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1 INTEGRATED COMPANY ANALYSIS Andy Fleming Laura Hausfeld Brett Hoerz Anna Lyman Eduardo Saenz DECEMBER 15, 2010
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Page 1: Kraft report

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INTEGRATED COMPANY ANALYSIS

Andy Fleming • Laura Hausfeld • Brett Hoerz • Anna Lyman • Eduardo Saenz

DECEMBER 15, 2010

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TABLE OF CONTENTS

EXECUTIVE SUMMARY 3

COMPANY OVERVIEW 3-4

COMPETITOR OVERVIEW 4

GLOBAL GROWTH STRATEGY - “HITTING OUR SWEET SPOT” 4-5

OREO IN INDIA: MARKETING ANALYSIS TARGET SEGMENT 5

POSITIONING 6

MARKETING MIX (PRODUCT, PLACEMENT, PROMOTION, PRICING) 6-8

COMPETITOR ANALYSIS 8

KRAFT IN INDIA: FUTURE MARKETING STRATEGIES NEW PRODUCTS 8

INNOVATION 8-9

ACCOUNTING INCOME STATEMENT ANALYSIS 9

BALANCE SHEET ANALYSIS 9-11

VALUATION

DISCOUNTED CASH FLOW (DCF) ANALYSIS 11

CONCLUSION 12

APPENDICES A. NET REVENUE BY OPERATING SEGMENT (2006, 2010) 13

B. HISTORY OF MERGERS, ACQUISITIONS & NAME CHANGES 14

C. NET REVENUE BY CONSUMER SECTOR (2006, 2010) 14-15

D. 11 $1 BILLION KRAFT BRANDS 15

E. 54 KRAFT BRANDS 16

F. KEY COMPETITOR ANALYSIS 17

G. HISTORY OF NEW PRODUCT INTRODUCTION (DOMESTIC) 18

H. SWOT ANALYSIS: KRAFT FOODS, INC. 19

I. SWOT ANALYSIS: CADBURY 19

J. SWOT ANALYSIS: OREO IN INDIA 20

K. EXAMPLE: OREO IN CHINA 20

L. INCOME STATEMENT: FORECASTING VARIABLES 21

M. INCOME STATEMENT (2008-2010 REAL, 2011- 2015 FORECASTED) 21

N. KRAFT OPERATING PROFITS BY SEGMENT 22

O. BALANCE SHEET: FORECASTING VARIABLES 23

P. BALANCE SHEET (2008-2010 REAL, 2011- 2015 FORECASTED) 24

Q. COMPOSITION OF DEBT 25

R. HISTORICAL CAPITALIZATION 26

S. LONG TERM AMORTIZATION TABLE 27

T. CAPITAL STRUCTURE DETAILS (2008, 2009) 28

U. HISTORICAL CASH FLOW 29

V. DISCOUNTED CASH FLOW MODEL - KRAFT 30-31

W. CAPITAL STRUCTURE 31

X. EARNINGS PER SHARE (EPS) 32

Y. KEY RATIOS 33

Z. MARKET CAPITALIZATION 34

AA. KEY EQUITY MULTIPLIERS 35

BB. KRAFT DEBT SCHEDULE 36

CC. NOTES TO WACC CALCULATION 36

DD. BETA CALCULATION: KRAFT 37

EE. BETA CALCULATION: COMPARABLES 37

FF. BETA CALCULATION: COMPETITORS 38

SOURCES 39-40

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EXECUTIVE SUMMARY

With its well-publicized acquisition of Cadbury in February 2010, Kraft gained access to the

British confectioners‟ extensive network of distribution channels in developing markets in Africa and

Asia. Declining domestic sales and the maturity of North American markets makes success abroad of

critical importance to the company‟s future. In addition, Kraft is targeting high margin categories such as

snacks, confectionary and quick meals for growth. The company‟s long-term growth strategy is to

position itself as a “global snacks powerhouse.”1

In order to accomplish this strategy successfully and sustainably, Kraft should:

employ a locally-focused marketing strategy in launching Oreo in India, and be conscious of

Indian consumers‟ tastes, buying preferences, and price sensitivity.

use successes and failures from the Oreo launch to develop best practices for other large-scale

product introductions in developing markets

manage its significant long-term debt through further restructuring, and avoid investing

activities that would increase its long-term debt

COMPANY OVERVIEW

Kraft Foods, Inc. is the world‟s second largest food company. 2009 revenues from its three

operating segments – Kraft Foods North America, Kraft Foods Europe, and Kraft Foods Developing

Markets - exceeded $40.4 billion. With respect to percentage of total revenues, Kraft is experiencing

significant growth in international markets (see Appendix A). The company currently has approximately

97,000 employees worldwide and sells its products to consumers in over 160 countries. Domestically,

Kraft products are present in more than 99% of American households.

Kraft‟s brands span six consumer sectors: Snacks, Beverages, Confectionary, Cheese, Grocery

and Convenient Meals. In February 2010, Kraft finalized its $19.5 billion acquisition of Cadbury, the

world‟s largest confectionary company (see Appendix B). While in 2006 Snacks and Beverages were

Kraft‟s two largest sectors, today Confectionary and Snacks are, and generate 51% of its revenues (see

Appendix C).

1 Kraft Foods, Inc. Annual Report. 2009. 25 February 2010. <http://www.sec.gov/>

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11 of Kraft Foods‟ brands annually earn more than $1 billion worldwide: Kraft cheese, Cadbury,

Oscar Mayer, Maxwell House, Nabisco, Oreo, Philadelphia Cream Cheese, Jacobs, Milka, LU, and

Trident (see Appendix D). Kraft maintains focus on its “unrivaled portfolio of brands people love,”2 as

more than 80% of its revenues come from products that hold the number one share position in their

respective categories.

Kraft‟s capital structure is 64.1% equity and 35.9% debt. Its operating margin is currently

13.69% (EBIT/revenue). Kraft is a high yield dividend-paying company offering 3.70% dividend yield.

Its earnings per share ratio (EPS) is currently 2.09.

COMPETITOR OVERVIEW

Given Kraft‟s large portfolio of brands (see Appendix E) and range of products, it faces

competition from domestic and international companies, smaller regional companies, and generic brands.

Some of Kraft‟s key competitors are Nestle, Pepsi-co, Coca-Cola, Danone, and Heinz. As Kraft moves

forward with its plan to capture market share in developing markets, it must be aware that several of its

competitors have similar growth strategies. For example, Coca-Cola has named Mumbai one of the cities

most important to its growth and Nestle touts its commitment to Middle East operations after opening a

$136 million manufacturing plant in Dubai (see Appendix F).

GLOBAL GROWTH STRATEGY - “HITTING OUR SWEET SPOT”

Seven months after acquiring Cadbury, Kraft announced a new global growth strategy. Centered

on marketing leading consumer brands (see Appendix G) and pursuing growth opportunities consistent

with consumer trends, this plan will ultimately increase shareholder value. Kraft‟s CEO Irene Rosenfeld

proclaimed that at Kraft, “we‟re hitting our sweet spot.”3

The plan builds on a set of four long-term strategic priorities, stated in the company‟s February

2010 10-K filings. These four priorities - focusing on growth categories, expanding footprint in

2 Kraft Foods, Inc. Quarterly Report. 2010. 6 August 2010. <http://www.sec.gov/>

3 “Kraft Foods Lays Out Its New Global Growth Strategy.” Kraft Foods News Center. Kraft Foods, Inc. 15

September 2010. Web.

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developing markets, expanding presence in instant consumption channels, and enhancing margins – are

intended to further transform Kraft into a leading snack, confectionary and quick meals company.

This focus on high cash flow segments and instant consumption channels will help fund Kraft‟s

growth in developing markets, which it predicts will make up one third of its business by 2013. Strategic

estimates aim for organic revenues growth of 5% or more, margins in the mid- to high-teens, and EPS

growth of 9-11%.

Kraft will implement these strategic priorities through the introduction of core brands into

emerging markets. A prime example is its planned full-scale launch of Oreo biscuits in India, which can

be used as a litmus test for future product introductions in similar markets (see Appendices H-J). The fact

that the company incurred an important amount of debt in acquiring Cadbury places even greater

importance on the success of Kraft‟s global growth strategy.

OREO IN INDIA: MARKETING ANALYSIS

India represents perhaps Kraft‟s most promising developing market, with its ballooning

population and growing consumer base. Distribution of Oreo biscuits in India is currently limited, and

the brand is primarily sold through import stores. Kraft has yet to fully launch Oreo using its newly

acquired Cadbury distribution network, but plans to do so within the next year. This analysis presents a

go-to-market strategy for Kraft‟s Oreo in India initiative and could be used as a model for how Kraft can

introduce its products into other developing markets in the future.

TARGET SEGMENT

The primary target segment for Oreo in India should be urban professionals between 24 and 39

years old. Based on India census data, this market consists of 32 million individuals. In addition, Kraft‟s

access to Cadbury‟s urban distribution network makes this target market accessible and actionable.

More importantly, this segment is differentiable by its snacking habits. This target customer has

a rising income, fast-paced lifestyle, and irregular work schedule, which leads to a greater likelihood of

snacking. For example, an Indian call center worker recently stated that “[s]nacking has become a part of

the call centre work culture. Since I work through the night, I always have either chips or wafers with me

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on my desk to keep me active and fresh. It also gives me a chance to enjoy a quick break from work. And

that's what my colleagues do too."4

POSITIONING

Although snacking is a part of Indian culture, it has traditionally been associated with leisurely

consumption. However, the purpose of snacking is changing as customers seek snacks that are

convenient, satiating, tasty, and easily portable for on-the-go consumption. Kraft should emphasize

Oreo‟s sweet taste and ability to stave off mid-day or late-night hunger.

The positioning statement for Oreo should therefore be: „For urban Indian professionals who

want a snack, Oreo is a biscuit that is sweet, tasty, and provides energy to get through the day.‟

PRODUCT

Kraft plans to introduce the standard American Oreo to the Indian market. However, the

company should be cognizant of Indian tastes and how they differ from those of American consumers;

and it should utilize test markets to gauge consumer preferences for Oreo biscuits before implementing a

full-scale launch.

For example, when Kraft launched Oreo in China, its sales initially flat-lined because the

traditional recipe was too sweet for Chinese consumers. Kraft then tested 20 reduced sugar versions

before settling on a new formula. In addition, the original package size was too large for Chinese

consumers, and so Kraft introduced a new, smaller package size. With these two product adjustments,

Oreo revenues doubled within two years (see Appendix K).

With this in mind, Kraft should be particularly attentive to the market‟s reaction to Oreo, and be

prepared to quickly make changes to the Oreo recipe should it not pique consumer tastes.

PLACEMENT

Kraft should maximize distribution in two types of Indian retail food outlets: mom-and-pop

stores known as „kirana‟ and convenience stores.

4 Caul, Mhunna. Personal interview. November 2010.

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Oreo‟s target customer traditionally purchases snacks through these channels, which are highly

accessible and already permeated by Cadbury.

The retail food market in India is highly fragmented. The traditional channels for fast-moving

consumer goods (FMCG) include general stores, convenience stores, hand cart vendors, and „kirana‟. Of

the 12 million retail food outlets in India, 7.3 million sell FMCG and 41% are in urban areas. Through

Cadbury, Kraft has obtained access to 1.2 million of these outlets.

Looking at how a customer would purchase Oreos supports this recommendation. Interviews

with people representative of Oreo‟s target segment along with observation indicate that „kirana‟ and

convenience stores are the primary outlets for snack purchases.

PROMOTION

Given Oreo‟s low brand maturity in India, promotional efforts should emphasize Oreo‟s specific

product attributes rather than appealing to emotional or nostalgic ties to the brand. To do this, Kraft

should create a campaign that emphasizes the sweet, delicious taste of Oreo and presents it as a

convenient, regular snack. The campaign could feature young, professional people eating Oreos to give

them a boost throughout the day.

Media campaigns should be transmitted through various outlets such as television, print, social

media, and billboards. However, any media advertising should be accompanied by large giveaways of

Oreo samples to induce trial. This tactic proved enormously successful in habituating the Brazilian

market to Tang, as well as the Chinese market to Oreo (in China, Oreo samples were handed out to more

than 300,000 consumers).

In China, senior management also encouraged local managers to develop promotional strategies,

saying "the more opportunity our local managers have to deal with local conditions will be a source of

competitive advantage for us.”5 For example, company-trained brand ambassadors rode around Beijing

on bicycles whose wheels were decorated with the Oreo image in order to increase brand awareness.

Kraft should use the same logic in India and support localized promotional efforts.

5 Jargon, Julie. “Kraft Reformulates Oreo, Scores in China.” Wall Street Journal. 1 May 2005.

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PRICING

Kraft should offer smaller Oreo packages with lower price points for entry, as it did in China.

Oreo has been considered a premium snack product in India. Because most Indian consumers have less

disposable income to spend on snacks, small low-priced packages are the way to give consumers the

opportunity to purchase while still maintaining profit margins.

COMPETITOR ANALYSIS

The two major competitors in the Indian biscuit market are local companies Parle and Britannia.

Parle has nearly a 40% market share in the Indian biscuits segment and Britannia has 38%. Kraft‟s

international competitors are also moving into India. In the last year, the British company United Biscuits

entered the Indian market and PepsiCo launched a savory biscuit specifically for the Indian consumer.

KRAFT IN INDIA: FUTURE MARKETING STRATEGIES

NEW PRODUCTS

Given the demands of Indian consumers, Kraft should consider new product development that

reflects local tastes and uses distinctive local ingredients. For example, Kraft‟s competitor PepsiCo has

found success in tailoring products to local tastes. Its Frito Lay division launched a product called

Kurkure to bridge the gap between its core product, potato chips, and a traditional Indian food called

„namkeens‟. This product was designed specifically for Indian consumers‟ tastes and is now one of the

most popular food products in India.

INNOVATION

Market research indicates that Indian consumers respond positively to product innovation. For

example, Perfetti Van Melle (PVM) holds 25% of the confectionary market in India, and attributes its

success to product innovation, which has allowed them to charge a price premium of 100% over

competition6.

6 “Sweet Surrender: Can Kraft's Cadbury Acquisition Help It Tap the Indian Market?” Indian

Knowledge@Wharton. Wharton School of the University of Pennsylvania. 25 February 2010. Web.

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Kraft should embrace the Indian market‟s responsiveness to innovation, and consider employing

novel strategies for product development, sales, distribution, and marketing.

ACCOUNTING

INCOME STATEMENT ANALYSIS (SEE APPENDICES L-N)

Between 2009 and the second quarter of 2010, Kraft‟s interest expense rose from $1.26 billion to

$1.58 billion, reflecting the increase in corporate debt from the Cadbury acquisition (from 18 billion in

2009 to 29 billion as of September 2010).

Kraft declared dividends of $1.16 in 2009, reflecting a smooth rise from $1.12 in 2008 and from

$1.04 in 2007. Its dividend payout in 2009 was 56.7% of net income, in line with its 5-year average.

KRAFT 5-yr Average 2009 2008 2007 2006 2005

Dividend Payout 62.1% 56.7% 89.9% 63.2% 51.0% 49.5%

Plowback 37.9% 43.3% 10.1% 36.8% 49.0% 50.5%

Kraft‟s interest coverage ratio rose slightly to 4.3x in 2009, which is still well below its five-year

average of 6.8x debt, meaning the company is comfortably able to handle its debt service payments.

KRAFT 5-yr Average 2009 2008 2007 2006 2005

Operating Margin 13.8% 13.5% 11.9% 13.1% 15.3% 15.3%

Interest Coverage 6.8x 4.3x 4.0x 7.8x 9.9x 8.0x

BALANCE SHEET ANALYSIS (SEE APPENDICES O-U)

Kraft‟s long-term debt more than doubled from $8.475 billion 2005 to $18.024 billion in 2009, as

a result of activities such as the acquisition of LU Biscuits in 2007 for $7.6 billion. The Cadbury

acquisition further increased debt levels by over $10 billion, bringing long-term debt to $29.571 billion in

2010. Kraft restructured two-thirds ($20 billion) of its debt in 2009, pushing it 30 years into the future.

Its current weighted average term of long-term debt is 20 years (66% restructured to 30 years and 33%

restructured to three years). As a result of restructuring, Kraft is now able to match long-term sources of

funds with long-term uses of funds. However, debt only partly funded the purchase. Kraft also divested

its profitable North American frozen pizza business to Nestle for $3.7 billion in 2010, a transaction which

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also decreased balance sheet accounts such as gross PP&E, Inventory, and Other Intangibles.

Accordingly, Kraft‟s Total Debt/ Capital ratio dropped 5% in 2009.

KRAFT 5-yr Average 2009 2008 2007 2006 2005

Total Debt/Total Capital 37.7% 42.3% 47.7% 43.5% 27.5% 27.5%

Kraft reported 1.75 billion shares of common stock in 2010 versus 1.48 billion shares in 2009.

This increase includes an issuance of 262 million additional shares of common stock, at a total fair value

of $7.457 billion, as part of the Cadbury acquisition.

Retained earnings rose to $14.636 billion in 2009, a rise of over $1 billion from $13.345 billion

retained earnings in 2008. Kraft‟s 2009 plowback ratio of 43.4% was a marked rise from 2008.

KRAFT 5-yr Average 2009 2008 2007 2006 2005

Plowback 37.9% 43.3% 10.1% 36.8% 49.0% 50.5%

Inventory increased with the Cadbury acquisition from $2.775 billion in 2009 to $5.735 billion in

September 2010. Accounts payable also increased from $3.766 billion in 2009 to $5.13 billion in the

second quarter of 2010, for the same reason. The acquisition had a marked influence on „days to

inventory‟ and „days to payable‟, increasing the former from 53 to 69 and the latter from 53 to 62. This

change could be attributed to a different pace of business overseas. Accounts receivable was less

dramatically affected by Cadbury, and has steadily increased over time from $4.704 billion in 2008, to

$5.197 billion in 2009, and to $6.013 billion in 2010.

It is important to note that Kraft changed its inventory valuation method from „LIFO‟ to „Average

Cost‟ in 2009. The use of average cost method is an industry trend among food manufacturers, including

many of Kraft‟s competitors. Future ease of comparison to competitors‟ financial statements is one

benefit of this switch. This change, however, does not materially impact stated financial projections.

VALUATION

DISCOUNTED CASH FLOW (DCF) ANALYSIS (SEE APPENDICES V-AA)

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Kraft is valued using a discounted cash flow analysis, the results of which are validated by

applying market-based price multiples. The DCF analysis is based primarily on earnings forecasts and

employs modest terminal growth rates. Calculations indicate Kraft‟s fair value price to be $43.33; but it

currently trades at a stock price of $31. At this price, the company is trading at an approximate 28.5%

discount to its fair value. The drivers behind this valuation are listed below:

REVENUE: Revenue is predicted to grow 5% annually from 2010-2012, based on company

estimates. Kraft has proactively responded to higher commodity prices by leveraging the power

of its brands and raising prices. It will be important to monitor Kraft‟s price spreads relative to its

competitors‟ to ensure that pricing does not impair future growth opportunities. In addition to

increasing prices, Kraft is expected to increase its revenues by leveraging the distribution

opportunities presented by the Cadbury acquisition.

COST OF GOODS SOLD (COGS): As a percentage of sales, COGS is projected to drop slightly

going forward. Inputs costs have jumped sharply in recent years and Kraft has increased its price

levels to better align with these costs by leveraging its strong brand portfolio. Going forward,

COGS as a percentage of sales is predicted to be approximately 62%, which represents the

average of Kraft‟s COGS as a percentage of sales from 2007 to 2009, rather than the recent high.

As per Kraft‟s third quarter 2010 earnings call, gross margin pressure is expected to ease as price

levels better align with input costs. 7

SELLING, GENERAL & ADMINISTRATIVE (SG&A): SG&A expenses are projected to remain at

23% of sales over the next 5 years. This figure is approximately 1% and 2% above the 2008 and

2009 percentage rates, respectively; and it assumes advertising expenses will increase in efforts to

develop new markets. The rise in advertising costs will be partially offset by cost savings

7 Rosenfeld, Irene. "Kraft Foods CEO Discusses Q3 2010 Results." Seeking Alpha. 4 November 2010. Web.

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resulting from Cadbury and LU integrations, as well as procurement, manufacturing and logistics.

Kraft recently affirmed that the anticipated cost savings from Cadbury and LU were on track.8

EBIT MARGIN: Kraft‟s operating margins are expected to rise to nearly 15% in the coming years,

as the company drives COGS down and makes a concentrated effort to expand margins in

Europe. This is a 1% increase over 2009 levels.

MARKET-BASED PRICE MULTIPLES: As evidenced by the P/E ratio, sales, EBIT and EBITDA

multiples below, Kraft is currently trading at a discount to its peers. This discount comports with

the 28% discount to fair value projected using the DCF model.

Source: Fact Set, as of 12/9/10

CONCLUSION Kraft, in 2010, is well on its way to becoming “a global snacks powerhouse” that takes full

advantage of its “unrivaled portfolio of brands people love.” With newly acquired distribution channels

that allow it to permeate international markets, Kraft can leverage its scale and brand equity to grow into

the future. To accomplish this global strategy successfully and sustainably, Kraft should localize

marketing efforts as well as create and utilize best practices in tailoring its products and promotions to

developing markets. Though it is in a strong financial position, the company must continue to manage its

long-term debt through smart restructuring and avoid investing activities that would increase its existent

debt. In doing all of this, Kraft will fully realize the potential of its investment in Cadbury.

8 Rosenfeld, Irene. "Kraft Foods CEO Discusses Q3 2010 Results." Seeking Alpha. 4 November 2010. Web.

Enterprise

Price / EPS

Enterprise Value /

Company Value LTM NTM Sales EBIT EBITDA

Kraft 82,051.4 12.07 13.45 1.8x 14.3x 12.1x

Mean 112,897.7 18.65 15.50 3.5x 15.0x 12.4x

Kraft Discount to Mkt

Nestle

224,788.2

(54.5%)

17.81

(15.2%)

15.88

(94%)

4.1x

(4.9%)

15.7x

(2.5%)

12.7x

Pepsi

121,159.3 16.32 14.09 2.3x 14.1x 11.3x

Coco-Cola 149,938.8 19.81 16.84 4.7x 16.0x 14.1x

Danone

48,957.5 22.01 15.58 4.5x 16.9x 13.4x

Heinz 19,644.9 17.27 15.14 1.9x 12.3x 10.4x

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APPENDICES

APPENDIX A – NET REVENUE BY OPERATING SEGMENT (2006, 2010)

Developing

Markets

13%

Europe

20%

North America

67%

KRAFT NET REVENUE

2006

Developing

Markets

26%

Europe

25%

North America

49%

KRAFT NET REVENUE

2010

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APPENDIX B - HISTORY OF MERGERS, ACQUISITIONS & NAME CHANGES

Year Kraft National Dairy Products

Corporation

General Foods

1928 Acquired Phenix Cheese

Company, maker of

Philadelphia brand cream

cheese. Changed name

to “Kraft-Phenix Cheese

Company”.

1930 Acquired Kraft-Phenix

Cheese Company

1969 Name changed to Kraftco Corporation.

1976 Name changed to Kraft, Inc.

1981 Acquired Oscar Mayer &

Co.

1985 Phillip Morris Companies

acquires General Foods

1986 Kraft, Inc. purchases Tombstone Pizza Corporation

1988 Phillip Morris acquires Kraft, Inc. for $12.9 billion

1989 Philip Morris combined Kraft, Inc. and General Foods Corporation to form Kraft

General Foods, the largest food company in the U.S.

1993 Nabisco ready-to-eat cold cereals acquired from RJR Nabisco.

1995 Kraft General Foods renamed Kraft Foods, Inc.

2000 Philip Morris acquires Nabisco Holdings for $18.9 billion.

2001 Philip Morris sells a 16.1 percent stake in Kraft Foods, Inc. to the public.

2007 Kraft Foods, Inc. acquires United Biscuit‟s operations in Spain and Portugal

2007 Kraft Foods, Inc. acquires LU Biscuit from Groupe Danone for $7.2 Billion

2010 Kraft Foods, Inc. acquires Cadbury for $19.5 Billion

APPENDIX C - NET REVENUE BY CONSUMER SECTOR (2006, 2010)

Grocery

14%

Convenient

Meals

15%

Cheese

17%Beverages

19%

Snacks

26%

Confectionary

9%

KRAFT NET REVENUE

2006

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APPENDIX C (CONTINUED) - NET REVENUE BY CONSUMER SECTOR (2006, 2010)

APPENDIX D - 11 $1 BILLION KRAFT BRANDS

Grocery

8%

Convenient

Meals

10%

Cheese

14%

Beverages

17%

Snacks

22%

Confectionery

29%

KRAFT NET REVENUE

2010

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APPENDIX E – 54 KRAFT BRANDS

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APPENDIX F – KEY COMPETITOR ANALYSIS

KRAFT: KEY COMPETITOR ANALYSIS

Note: Kraft faces many competitors given its wide array of product categories. For the purposes of this

analysis, competitors were chosen that also have an international presence and compete with Kraft in one

or more product categories. Particular focus is given to presence in India.

COCA COLA COMPANY:

Coca Cola is a major international beverage company. It owns or licenses over 500 nonalcoholic

beverages and is the world‟s largest juice and juice drink company. Its brands include Coca Cola,

Fruitopia, Dasani, and Powerade. It has an extensive worldwide network of bottlers and distributors and is

present in over 200 countries. Coca Cola is making a push into developing countries over the next 10

years; specifically it lists Mumbai, India as one of its top “Cities Key to Our Growth” as the GDP there is

expected to see growth of $141 billion through 2020.

DANONE:

The France based Danone is a provider of healthy food products. Its products include dairy, water, and

baby nutrition and it is number one in the world for fresh dairy. Its brands include Actimel, Activia, and

Evian. Danone has a goal to double its geographic reach and it is currently established in over 40

developing countries. It recently left the global biscuit business (sold to Kraft in 2007). Danone is having

a lot of success with milk products in India, even following its recent split from Indian based Britannia.

HEINZ:

Heinz is the most global of all U.S. based food companies, with products in over 200 countries. It

provides foods with an emphasis on health and wellness, including ketchup, sauces, snacks, and infant

nutrition. Heinz entered the Indian market in 1994 with its takeover of the Family Product Division of

Glaxo. It currently has an array of strong, recognizable brands in India, including Complan Milk Biscuits.

NESTLE:

Nestle has a wide range of products, including confectionary, dairy, cereals, coffee, and nonalcoholic

beverages. It is the world‟s largest food company and has a focus on nutrition, health and wellness. Nestle

already has a strong presence in India as it offers a wide range of products and is a well respected brand.

It recently announced it will be increasing its investments in India. It also just opened a large

manufacturing plant in Dubai, confirming its commitment to the Middle East.

PEPSICO:

PepsiCo has a range of products including beverages, snacks, and cereals. Its brands include Pepsi-Cola,

Frito-Lay, Tropicana, Quaker, and Gatorade. It has a large international presence and its products are

available in over 150 countries. PepsiCo is currently focusing on expanding its distribution network and

recently agreed to acquire 66% of Russia‟s Wimm-Bill-Dann Dairy & Juice Company which will make

Pepsi the largest food and beverage business in Russia. PepsiCo is performing well in its Asia, Middle

East, and Africa segment and notes exceptional growth in its India beverage business.

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APPENDIX G - HISTORY OF NEW PRODUCT INTRODUCTION (DOMESTIC)

Year New Product

1765 Baker‟s chocolate brand introduced in Dorchester, MA

1880 Philadelphia Brand Cream Cheese introduced to market by the Empire Cheese

Company of New York

1892 Maxwell House coffee blend developed in Nashville, TN

1895 C.W. Post created Grape-Nuts cereal in Battle Creek, Michigan

1899 Trademark rights to Jell-O brand gelatin purchased

1903 National Biscuit Company (N.B.C.) launches the Oreo brand cookie.

1914 J.L. Kraft & Bros. Co. began producing process cheese in tins, which was shipped to

armed forces during World War I

1927 Kool-Aid powdered fruit drink created

1928 J.L. Kraft & Bros. Co. introduces Velveeta brand process cheese

1933 J.L. Kraft & Bros. Co. introduces Miracle Whip brand salad dressing at Chicago‟s

World‟s Fair

1934 Ritz crackers are launched by N.B.C.

1937 Kraft macaroni and cheese dinner introduces

1949 Minute brand rice distributed nationally

1950 Kraft deluxe process cheese slices introduced to the U.S. market

1952 Cheez Whiz pasteurized process cheese spread introduced.

1954 Cracker Barrel brand natural cheese introduced.

1957 Tang breakfast beverage crystals introduced by General Foods Corporation.

1965 Shake „N Bake coating mix introduced by General Foods Corporation

1966 Cool Whip nondairy topping introduced

1972 Stove Top stuffing mix introduced

1973 General Foods International Coffees flavored coffees introduced by General Foods

Corporation

1988 Lunchables brand meat and cheese snacks introduced by Oscar Mayer

1989 Di Giorno brand refrigerated pastas and sauces introduced

1998 Easy Mac microwavable macaroni and cheese dinner introduced

2004 100 Calorie Packs introduced

2010 Oscar Mayer Carving Board sliced deli meats introduced

Page 19: Kraft report

19

APPENDIX H - SWOT ANALYSIS: KRAFT FOODS, INC.

Strengths Weaknesses

Portfolio of iconic brands

Fully penetrated domestic

distribution

Well-positioned after recent

price wars

Pricing power due to

important brands

Long-term strategy is undifferentiated from

competitors‟

Low number of distinctly differentiated products /

high opportunity for customer switching

Dependence on a few large retailers for distribution

Declining sales volume in U.S., particularly of

cheese

Passive response to health trends and development

of healthy products/brands

Slow movement into new communications

platforms, particularly social media

High debt levels

Opportunities Threats

Growth in emerging markets

Consolidated focus on snacks,

confectionary and quick

meals allows Kraft to shed

peripheral holdings

Expanding margins in Europe

Rise in demand for natural & organic foods hurts

the processed food manufacturers

Increasing raw material prices hurt earnings

Economic situation driving prices down

Strained relationship with Starbucks could result in

loss of profitable operating segment

Fluctuation of foreign exchange rates affects

company performance

Proliferation of generic/store brands

Change in regulations for tax treatment of

dividends

APPENDIX I - SWOT ANALYSIS: CADBURY ACQUISITION

Strengths Weaknesses

Access to established distribution networks

in developing markets

Competitive victory over Hershey – clear

demonstration of muscle

Greater confectionary synergies

Combined increased gum/chocolate market

share

Forced divestiture of profitable frozen

pizza division

Hostile negotiation process

Negative press coverage of British

opposition and Warren Buffet‟s

disapproval

Companies historically pursued

different positioning

Opportunities Threats

Inroads into Africa and South Asia through

Cadbury subsidiaries

Leveraging Cadbury brand equity in

developing markets

Focus on international operations

could weaken domestic business

Integration difficulties

Possible “brain drain” from Cadbury

Page 20: Kraft report

20

APPENDIX J - SWOT ANALYSIS: OREO IN INDIA

Strengths Weaknesses

Distribution benefits from Cadbury‟s

supply chain network

Product well-aligned to Indian consumers‟

penchants for sweets and increasingly

frequent snacking habits

Vegetarian

Appropriate to climate (non-melting, long

shelf life)

Proven success in Chinese market

Inherent disorganization of

distribution channels

Low maturity brand / low brand

awareness

Potential for a slow start

Potential taste disparities/need to

alter recipe, flavor

Pricing problems, low margins

Lack of existing Kraft brand foothold

in snacks

Opportunities Threats

Growing demand for snack foods

Creation of market for Kraft snacks

Line extensions

Establish method for introducing future

products

Get a grassroots knowledge of Indian

consumer market

Potential alliances with local biscuit

manufacturers

Backlash of Indian market to

American corporations and packaged

goods

Quality control in manufacturing

Low association between Oreo and

Kraft means Kraft cannot leverage

the biscuit‟s success

Losing in-store to competitors

APPENDIX K – EXAMPLE: OREO IN CHINA

Page 21: Kraft report

21

APPENDIX L – INCOME STATEMENT: FORECASTING VARIABLES

APPENDIX M – INCOME STATEMENT (2008-2010 REAL, 2011- 2015 FORECASTED)

REVENUE FORECAST

Country % KFT sales

10% Develop. Mkts 26%

2-3% Euro 25%

3-4% US 49%

Total

2008 2009 Sep 10 real - Dic (F) 2011 2012 2013 2014 2015

Sales Growth 17% -4% 18% 5.0% 5.0% 5.0% 3.0% 3.0%

COGS as % of Sale 67% 64% 63% 62.5% 62.0% 62.0% 62.0% 62.0%

SGA 21% 22% 23% 23% 23% 23% 23% 23%

Net PP&E 9,917.0 10,693.0 13,710.0

Depreciation & Amort. 937.0 905.0 1,134.0

Depreciation/PPE 9.4% 8.5% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27%

Interest Expense Calculation

* As per the amortization Table (sum of the 12 months corresponded for each period)

Income Tax Calculation 2,603 4,287 4,162

Income Tax Expense 755 1,259 1,344

Income Tax (%) 29% 29.4% 32% 29% 29% 29% 29% 29%

5.0%

Weighted GrowthAnnual Sales Growth

INCOME STATEMENT FORECAST TABLE

Expected Sales Growth for years 2011 - 2012

2.6%

0.6%

1.7%

INCOME STATEMENT

For the Fiscal Period Ending

Restated

12 mos.

12/31/08

12 months

12/31/09 Sep 10 real - Dic (F) 12/31/11 12/31/1212/31/13 12/31/14 12/31/15

Currency USD USD USD USD USD USD USD USD

Revenue 41,932 40,386 47,663 50,046 52,548 55,176 56,831 58,536

Other Revenue - - - 0 0 0 0 0

Total Revenue 41,932 40,386 47,663 50,046 52,548 55,176 56,831 58,536

Cost Of Goods Sold 28,050 25,786 29,949 31,279 32,580 34,209 35,235 36,292

Gross Profit 13,882 14,600 17,714 18,767 19,968 20,967 21,596 22,244

Selling General & Admin Exp. 8,712 9,002 10,946 11,511 12,086 12,690 13,071 13,463

Amort. of Goodwill and Intangibles 23 26 157 0 0 0 0 0

Depretiation Expense 179 182 186 190 193

Other Operating Exp., Total 8,735 9,028 11,103 11,689 12,268 12,876 13,261 13,657

Operating Income 5,147 5,572 6,611 7,078 7,700 8,090 8,335 8,587

Interest Expense -1,272 -1,260 -1,579 -1,825 -1,775 -1,722 -1,666 -1,606

EBT 2,603 4,287 4,162 5,253 5,925 6,368 6,669 6,981

Income Tax Expense 755 1,259 1,344 1,543 1,740 1,870 1,959 2,050

Minority Int. in Earnings -9 -7 -19

Earnings from Cont. Ops. 1,839 3,021 2,799 3,710 4,185 4,498 4,711 4,931

Earnings of Discontinued Ops. 1,045 - 1,485

Extraord. Item & Account. Change - - -

Net Income 2,884 3,021 4,284 3,710 4,185 4,498 4,711 4,931

Page 22: Kraft report

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APPENDIX N – KRAFT OPERATING PROFITS BY SEGMENT

BUSINESS SEGMENTS

For the Fiscal Period Ending

Restated

12 months

12/31/07

Restated

12 months

12/31/08

12

months

12/31/09

Currency USD USD USD

Revenues

Kraft Foods North America - U.S. Beverages US 2,990.0 3,001.0 3,057.0

Kraft Foods North America - U.S. Cheese US 3,745.0 4,007.0 3,605.0

Kraft Foods North America - U.S. Convenient Meals US 3,905.0 4,240.0 4,496.0

Kraft Foods North America - U.S. Grocery US 3,277.0 3,389.0 3,453.0

Kraft Foods North America - U.S. Snacks US 4,879.0 5,025.0 4,964.0

Kraft Foods North America - Canada & N.A. Foodservice US 4,080.0 4,294.0 4,087.0

North America - Beverages US - - -

North America - Cheese & Food Service US - - -

North America - Convenient Meals US - - -

North America - Grocery US - - -

North America - Snacks & Cereals US - - -

Total US 22,876.0 23,956.0 23,662.0

Kraft Foods Europe Europe 7,007.0 9,728.0 8,768.0

Kraft Foods Developing Markets Developing Mkts. 5,975.0 8,248.0 7,956.0

Total Revenues 35,858.0 41,932.0 40,386.0

Operating Profit Before Tax

Kraft Foods North America - U.S. Beverages 346.0 381.0 511.0

Kraft Foods North America - U.S. Cheese 487.0 563.0 667.0

Kraft Foods North America - U.S. Convenient Meals 319.0 339.0 510.0

Kraft Foods North America - U.S. Grocery 1,022.0 1,009.0 1,146.0

Kraft Foods North America - U.S. Snacks 716.0 638.0 723.0

Kraft Foods North America - Canada & N.A. Foodservice 443.0 448.0 527.0

Kraft Foods Europe 455.0 182.0 785.0

Kraft Foods Developing Markets 588.0 815.0 936.0

Corporate - - -

North America - Beverages - - -

North America - Cheese & Food Service - - -

North America - Convenient Meals - - -

North America - Grocery - - -

North America - Snacks & Cereals - - -

Total Operating Profit Before Tax 4,376.0 4,375.0 5,805.0

Page 23: Kraft report

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EXHIBIT O – BALANCE SHEET: FORECASTING VARIABLES

Balance Sheet Historic Data 2008 2009 2010 Forecast 2011 - 2115

Accounts Receivable 4,704 5,197 6,013

Receivables Turnover 8.9 7.8 7.9 8.0

Days To Receivables 40 46 45 45

Inventory 3,881 3,775 5,735

Inventory Turnover 7 7 5 5.2

Days to Inventory 50 53 69 69

Accounts Payable 3,373 3,766 5,130

Payables Turnover 8.3 6.8 5.8 5.8

Days to Payables 43 53 62 62

Accrued Expenses 2,754.0 3,356.0 3,144.0

Accrued Expenses as % to COGS 10% 13% 10% 11%

Calcualtion Of Payment for LTD

Long Term Debt

Term

Interest Rate

Payment

PPE 17,815.0 19,423.0 22,644.0

PPE Growth -7.2% 9.0% 16.6% 2.0%

Depretiation Expense 0.44 0.45 39% 39%

Other Variables Growth

Short Term Investment Growth

Deferred Tax Assets, Curr.

Other Current Assets

Accrued Exp.

Other Current Liabilities

Pension & Other Post-Retire. Benefits

Def. Tax Liability, Non-Curr.

These accounts have the same forecasted annual growth as Revenues

These accounts have the same forecasted annual growth as COGS

BALANCE SHEET FORECAST TABLE

Dividend Payout Calculations 2011 2012 2013 2014 2015

Net Income 3,710 4,185 4,498 4,711 4,931

Outstanding Shares 1,747 1,747 1,747 1,747 1,747

EPS 2.12 2.40 2.58 2.70 2.82

Dividend Payout % per share 60% 60% 60% 60% 60%

Dividen Paid per share 1.274 1.437 1.545 1.618 1.694

Total Amount of Dividend Paid (Div. per share x Outstand. shares) 2,226 2,511 2,699 2,826 2,959

Page 24: Kraft report

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APPENDIX P – BALANCE SHEET (2008-2010 REAL, 2011- 2015 FORECASTED)

BALANCE SHEET

Balance Sheet as of: Restated

12/31/08

Restated

12/31/09

Sep 10 real-

Dic (F) 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15

Currency USD USD USD

ASSETS

Cash And Equivalents 1,244.0 2,101.0 2,288.0

Short Term Investments - 153.0 -

Trading Asset Securities - - 84.0 88.2 92.6 97.2 102.1 107.2

Accounts Receivable 4,704.0 5,197.0 6,013.0 6,255.8 6,568.6 6,897.0 7,103.9 7,317.0

Total Receivables 4,704.0 5,197.0 6,013.0 6,255.8 6,568.6 6,897.0 7,103.9 7,317.0

Inventory 3,881.0 3,775.0 5,735.0 5,995.1 6,244.5 6,556.7 6,753.4 6,956.0

Deferred Tax Assets, Curr. 804.0 730.0 901.0 946.1 993.4 1,043.0 1,095.2 1,149.9

Other Current Assets 828.0 498.0 803.0 843.2 885.3 929.6 976.1 1,024.9

Total Current Assets 11,461.0 12,454.0 15,824.0 14,128.3 14,784.3 15,523.6 16,030.7 16,555.0

Gross Property, Plant & Equipment 17,815.0 19,423.0 22,644.0 23,096.9 23,558.8 24,030.0 24,510.6 25,000.8

Accumulated Depreciation (7,898.0) (8,730.0) (8,934.0) (9,112.7) (9,294.9) (9,480.8) (9,670.4) (9,863.9)

Net PP&E 9,917.0 10,693.0 13,710.0 13,984.2 14,263.9 14,549.2 14,840.1 15,136.9

Goodwill 27,581.0 28,764.0 36,764.0 36,764.0 36,764.0 36,764.0 36,764.0 36,764.0

Other Intangibles 12,926.0 13,429.0 25,476.0 25,476.0 25,476.0 25,476.0 25,476.0 25,476.0

Other Long-Term Assets 1,288.0 1,374.0 1,846.0 1,846.0 1,938.3 1,938.3 1,938.3 1,938.3

Total Assets 63,173.0 66,714.0 93,620.0 92,198.5 93,226.5 94,251.0 95,049.1 95,870.3

LIABILITIES

Accounts Payable 3,373.0 3,766.0 5,130.0 5,386.9 5,611.0 5,891.6 6,068.3 6,250.4

Accrued Exp. 2,754.0 3,356.0 3,144.0 3,301.2 3,466.3 3,639.6 3,821.6 4,012.6

Short-term Borrowings 897.0 453.0 331.0

Curr. Port. of LT Debt 765.0 513.0 460.0

Curr. Income Taxes Payable - - -

Other Current Liabilities 3,255.0 3,403.0 4,561.0 4,789.1 4,789.1 4,789.1 4,789.1 4,789.1

Total Current Liabilities 11,044.0 11,491.0 13,626.0 13,477.2 13,866.4 14,320.2 14,678.9 15,052.1

Long-Term Debt 18,589.0 18,024.0 29,571.0 29,246.7 28,408.5 27,517.3 26,569.7 25,562.2

Minority Interest 61.0 96.0 102.0 107.1 112.5 118.1 124.0 130.2

Pension & Other Post-Retire. Benefits 5,045.0 4,581.0 5,334.0 5,600.7 5,880.7 6,174.8 6,483.5 6,807.7

Def. Tax Liability, Non-Curr. 4,064.0 4,508.0 6,992.0 7,341.6 7,708.7 8,094.1 8,498.8 8,923.8

Other Non-Current Liabilities 2,075.0 2,138.0 3,115.0 3,270.8 3,434.3 3,606.0 3,786.3 3,975.6

Total Liabilities 40,878.0 40,838.0 58,740.0 59,044.0 59,298.6 59,712.4 60,017.3 60,321.3

Common Stock - - -

Additional Paid In Capital 23,563.0 23,611.0 31,181.0 31,181.0 31,181.0 31,181.0 31,181.0 31,181.0

Retained Earnings 13,440.0 14,636.0 16,621.0 18,105.1 19,779.0 21,578.2 23,462.4 25,434.8

Treasury Stock (8,714.0) (8,416.0) (8,202.0) (8,202.0) (8,202.0) (8,202.0) (8,202.0) (8,202.0)

Comprehensive Inc. and Other (5,994.0) (3,955.0) (4,720.0) (4,720.0) (4,720.0) (4,720.0) (4,720.0) (4,720.0)

Total Common Equity 22,295.0 25,876.0 34,880.0 36,364.1 38,038.0 39,837.2 41,721.4 43,693.8

Total Liabilities And Equity 63,173.0 66,714.0 93,620.0 95,408.1 97,336.5 99,549.6 101,738.7 104,015.1

Page 25: Kraft report

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APPENDIX Q – COMPOSITION OF DEBT

Debt Summary Data 2007 2008 2009

Total Senior Bonds and Notes 19,094 91% 19,282 95% 18,467 97%

Total Commercial Paper 1,608 8% 606 3% 262 1%

Other Debt 307 1% 363 2% 262 1%

Total 21,009 20,251 18,991

(in millions)

COMPOSITION OF DEBT

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2007 2008 2009

$ (

in m

illio

ns)

YEAR

Other Debt

Total Commercial Paper

Total Senior Bonds and Notes

Page 26: Kraft report

26

Year 2010

Total Debt 30,362.0

Minority Interest 102.0

Market Cap 54,289.7

36%

0%

64%

Components of TotalEnterprise Value

Total Debt Minority Interest Market Cap

Year 2010

Total Debt 30,362.0

Minority Interest 102.0

Market Cap 54,289.7

36%

0%

64%

Components of TotalEnterprise Value

Total Debt Minority Interest Market Cap

APPENDIX R – HISTORICAL CAPITALIZATION

NOTE: As reflected in the table to the left, almost

two thirds of the capital structure is debt and one

third derives from equity.

USD USD USD USD USD USD

In Millions of Dollars Aug-05-2009 Nov-03-2009 Feb-25-2010 May-07-2010 Aug-06-2010 Nov-05-2010

Total Debt 20,225.0 20,725.0 18,990.0 31,036.0 30,159.0 30,362.0

Minority Interest 84.0 86.0 96.0 316.0 60.0 102.0

Market Cap 41,785.8 40,644.5 42,620.7 52,426.5 52,949.6 54,289.7

HISTORIC CAPITALIZATION

0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

80,000.0

90,000.0

Components of Total Enterprise Value

Market Cap

Minority Interest

Total Debt

Page 27: Kraft report

27

APPENDIX S – LONG TERM AMORTIZATION TABLE

NOTE: The charts above display the first year of the long-term amortization of Kraft‟s debt. The values

regarding the long-term balance of debt as well as the annual interest expense are directly linked to this

table, which has a 10 years term.

LONG-TERM AMORTIZATION TABLE

Inputs

Loan Amount 30,035$

Annual Interest Rate 6.15%

Term of Loan in Years 20

First Payment Date 1/1/2011

Frequency of Payment Monthly

Rate (per period) 0.513%

Payment (per period) $217.79

Total Payments $52,268.24

Total Interest $22,233.24

Interest Savings $0.70

Summary

No. Due Date

Payment

Due

Additional

Payment Interest Principal Balance

$30,035

1 1/1/2011 217.79 0.00 153.93 63.86 29,971.14

2 2/1/2011 217.79 0.00 153.60 64.19 29,906.95

3 3/1/2011 217.79 0.00 153.27 64.52 29,842.43

4 4/1/2011 217.79 0.00 152.94 64.85 29,777.58

5 5/1/2011 217.79 0.00 152.61 65.18 29,712.40

6 6/1/2011 217.79 0.00 152.28 65.51 29,646.89

7 7/1/2011 217.79 0.00 151.94 65.85 29,581.04

8 8/1/2011 217.79 0.00 151.60 66.19 29,514.85

9 9/1/2011 217.79 0.00 151.26 66.53 29,448.32

10 10/1/2011 217.79 0.00 150.92 66.87 29,381.45

11 11/1/2011 217.79 0.00 150.58 67.21 29,314.24

12 12/1/2011 217.79 0.00 150.24 67.55 29,246.69

Page 28: Kraft report

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APPENDIX T – CAPITAL STRUCTURE DETAILS (2008, 2009)

FY 2009 Capital Structure As Reported Details

Description Type

Principal Due

(USD) Coupon Rate Maturity Seniority Secured Convertible

Repayment

Currency

7% Debenture Bonds and Notes - 7.000% Nov-01-2011 Senior No No USD

Capital Leases Capital Lease 66.0 NA - Senior Yes No USD

Commercial Paper Commercial Paper 262.0 0.500% Dec-31-2010 Senior No No USD

Euro Notes Bonds and Notes 4,072.0 5.750% - 6.250% 2015 Senior No No EUR

Notes Bonds and Notes 9,045.0 0.770% - 7.552% 2039 Senior No No USD

Other Borrowings Other Borrowings 5.0 NA - Senior No No NA

Senior Unsecured Notes Bonds and Notes 500.0 6.750% Feb-19-2014 Senior No No USD

Senior Unsecured Notes Bonds and Notes 750.0 6.875% Jan-26-2039 Senior No No USD

Senior Unsecured Notes Bonds and Notes 1,250.0 6.125% Aug-23-2018 Senior No No USD

Senior Unsecured Notes Bonds and Notes 2,000.0 5.750% Mar-20-2012 Senior No No USD

Senior Unsecured Notes Bonds and Notes 850.0 6.250% Mar-20-2015 Senior No No USD

Uncommitted Credit Lines Revolving Credit 191.0 5.900% Dec-31-2010 Senior No No USD

FY 2008 Capital Structure As Reported Details

Description Type

Principal Due

(USD) Coupon Rate Maturity Seniority Secured Convertible

Repayment

Currency

7% Debenture Bonds and Notes 182.0 7.000% Nov-01-2011 Senior No No USD

Capital Leases Capital Lease 61.0 NA - Senior Yes No USD

Commercial Paper Commercial Paper 606.0 0.500% Dec-31-2010 Senior No No USD

Euro Notes Bonds and Notes 3,970.0 5.750% - 6.250% 2015 Senior No No EUR

Notes Bonds and Notes 9,780.0 0.770% - 7.552% 2039 Senior No No USD

Other Borrowings Other Borrowings 11.0 NA - Senior No No NA

Senior Unsecured Notes Bonds and Notes 1,250.0 6.125% Aug-23-2018 Senior No No USD

Senior Unsecured Notes Bonds and Notes 750.0 6.875% Jan-26-2039 Senior No No USD

Senior Unsecured Notes Bonds and Notes 500.0 6.750% Feb-19-2014 Senior No No USD

Senior Unsecured Notes Bonds and Notes 850.0 6.250% Mar-20-2015 Senior No No USD

Senior Unsecured Notes Bonds and Notes 2,000.0 5.750% Mar-20-2012 Senior No No USD

Uncommitted Credit Lines

for Working capital Needs

Revolving Credit 291.0 13.000% Dec-31-2009 Senior No No USD

Page 29: Kraft report

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APPENDIX U – HISTORICAL CASH FLOW

For the Fiscal Period Ending 2005 2006 2007 2008 2009

Currency USD USD USD USD USD

Net Income 2,632.0 3,060.0 2,721.0 2,884.0 3,021.0

Depreciation & Amort. 867.0 819.0 829.0 937.0 905.0

Amort. of Goodwill and Intangibles 10.0 7.0 13.0 23.0 26.0

Depreciation & Amort., Total 877.0 826.0 842.0 960.0 931.0

(Gain) Loss From Sale Of Assets (108.0) (368.0) (14.0) 92.0 6.0

Asset Writedown & Restructuring Costs 315.0 793.0 209.0 731.0 17.0

Stock-Based Compensation - 142.0 136.0 178.0 164.0

Net Cash From Discontinued Ops. 34.0 65.0 44.0 (900.0) -

Other Operating Activities (408.0) (168.0) (271.0) (112.0) 314.0

Change in Acc. Receivable 65.0 (200.0) (268.0) (39.0) (17.0)

Change In Inventories (42.0) (149.0) (404.0) (151.0) 299.0

Change in Acc. Payable 74.0 256.0 241.0 29.0 126.0

Change in Inc. Taxes (33.0) - - - -

Change in Other Net Operating Assets 58.0 (537.0) 335.0 469.0 223.0

Cash from Ops. 3,464.0 3,720.0 3,571.0 4,141.0 5,084.0

Capital Expenditure (1,171.0) (1,169.0) (1,241.0) (1,367.0) (1,330.0)

Cash Acquisitions - - (7,437.0) (99.0) -

Divestitures 1,668.0 946.0 216.0 97.0 41.0

Invest. in Marketable & Equity Securt. - - - - -

Net (Inc.) Dec. in Loans Originated/Sold - - - - -

Other Investing Activities 28.0 107.0 46.0 49.0 50.0

Cash from Investing 525.0 (116.0) (8,416.0) (1,320.0) (1,239.0)

Total Debt Issued 176.0 474.0 12,144.0 7,018.0 3.0

Total Debt Repaid (1,780.0) (1,324.0) (1,621.0) (6,707.0) (1,414.0)

Repurchase of Common Stock (1,175.0) (1,254.0) (3,708.0) (777.0) -

Common Dividends Paid (1,437.0) (1,562.0) (1,638.0) (1,663.0) (1,712.0)

Total Dividends Paid (1,437.0) (1,562.0) (1,638.0) (1,663.0) (1,712.0)

Special Dividend Paid - - - - -

Other Financing Activities 265.0 (54.0) (56.0) 72.0 (10.0)

Cash from Financing (3,951.0) (3,720.0) 5,121.0 (2,057.0) (3,133.0)

Foreign Exchange Rate Adj. (4.0) 39.0 52.0 (87.0) 145.0

Net Change in Cash 34.0 (77.0) 328.0 677.0 857.0

Cash Flow

Page 30: Kraft report

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APPENDIX V – DISCOUNTED CASH FLOW MODEL - KRAFT

DISCOUNTED CASH FLOW MODEL - KRAFT

All figures in millions, except per share data

Operating scenario:

Last fiscal year end date: 12/31/10

Valuation / deal date: 01/01/11

Stub year fraction: 99.7%

Weighted average cost of capital: 6.2%

Free cash flow buildup

Projected Annual Forecast

1 2 3 4 5

2011 2012 2013 2014 2015

12/31/11 12/31/12 12/31/13 12/31/14 12/31/15

US 25,030.1 24,260.9 23,171.8 23,207.7 23,211.3

Europe 11,541.9 12,725.0 14,029.3 14,739.2 15,485.0

Emerging Markets 13,474.1 15,562.6 17,974.7 18,884.3 19,839.8

Total Revenues 50,046.2 52,548.5 55,175.9 56,831.2 58,536.1

EBITDA 7,256.7 7,882.3 8,276.4 8,524.7 8,780.4

EBIT 7,078.0 7,700.0 8,090.5 8,335.1 8,587.0

Tax rate 29.4% 29.4% 29.4% 29.4% 29.4%

EBIAT 4,999.4 5,438.7 5,714.5 5,887.2 6,065.2

Depreciation & Amortization 178.7 182.3 185.9 189.6 193.4

Account Receivable (242.8) (312.8) (328.4) (206.9) (213.1)

Inventories (260.1) (249.4) (312.2) (196.7) (202.6)

Account Payable 256.9 224.1 280.6 176.7 182.1

Accrued expenses 157.2 165.1 173.3 182.0 191.1

Changes in working capital (88.7) (173.0) (186.8) (44.9) (42.6)

Capital expenditures (452.9) (461.9) (471.2) (480.6) (490.2)

Unlevered free cash flows 4,636.4 4,986.0 5,242.4 5,551.4 5,725.8

Discount factor 0.942 0.887 0.835 0.786 0.741

Present value of free cash flows 4,366.1 4,421.4 4,377.8 4,365.4 4,240.0

Sum of present values of FCFs 21,770.7

Terminal value Equity value calculations

Growth in perpetuity method Enterprise value 104,246.4

Long term growth rate 1.0% Calculation of net debt:

Free cash flow (t+1) 5,783.0 Current portion of long-term debt 331.0

Terminal value 111,376.2 Short term debt 460.0

PV of Terminal Value 82,475.7 Long term debt 30,035.0

Sum of present values of FCFs 21,770.7 Convertible debt 0.0

Enterprise value 104,246.4 Minority interest 102.0

Exit multiple method Less: Excess cash (2,288.0)

Exit EV / EBITDA multiple 12.0x Less: Equity investments (84.0)

LTM EBITDA at end of projection 8,780.4 Net debt 28,556.0

Terminal value 105,365.0 Equity value 75,690.4

Present value of terminal value 78,024.3 Shares outstanding 1,746.8

Enterprise value 99,795.0 Equity value / share $43.33

Page 31: Kraft report

31

APPENDIX V (CONTINUED) – DISCOUNTED CASH FLOW MODEL - KRAFT

PERCENTAGE OF NET REVENUES

Segment 2009 2011 2012 2013 2014 2015

US 50.01% 46.17% 42.00% 40.84% 39.65% 38.45%

Europe 23.06% 24.22% 25.43% 25.94% 26.45% 26.98%

Develop. 26.92% 29.62% 32.58% 33.23% 33.89% 34.57%

APPENDIX W – CAPITAL STRUCTURE

NOTE: The table above represents forecasts of equity value (25 different outputs) per share, using as

variables for forecasting: Perpetuity Growth (x axis), Discount Rates (y axis).

Cost of debt Capital structure

Cost of debt 6.15% Current capital structure

Marginal tax rate 29.4% Market value % Weight

Cost of debt after tax shield 4.3% Net debt 30,035.0 35.9%

Equity 53,521.0 64.1%

Cost of equity Total 83,556.0

Risk-Free Rate (rf) 4.25%

Market Risk 9.77%

Market Risk Premium (rm-rf) 5.5% Weighted average cost of capital

Raw (observed) beta 0.54 Weighted average cost of capital: 6.19%

Cost of Equity 7.23%

Summary DCF Output

$43.33 1.0% 1.5% 3.0% 4.0% 5.0%

6.2% $43.34 $48.63 $74.44 $111.28 $209.94

7.0% 35.18 38.97 56.02 76.86 118.54

8.0% 27.70 30.34 41.46 53.51 73.59 Equity value / share

9.0% 22.09 24.02 31.76 39.50 51.11

10.0% 17.73 19.19 24.83 30.16 37.63

Perpetuity Growth

Discount rates

Page 32: Kraft report

32

APPENDIX X – EARNINGS PER SHARE (EPS)

KRAFT 2011 2012 2013 2014 2015

EPS $2.12 $2.40 $2.58 $2.70 $2.82

Dividend $1.27 $1.44 $1.55 $1.62 $1.69

Plowback $0.85 $0.96 $1.03 $1.08 $1.13

Dividend Payout 60% 60% 60% 60% 60%

EPS

$2.12 $2.40 $2.58 $2.70 $2.82

$1.27 $1.44 $1.55 $1.62 $1.69

$0.85 $0.96 $1.03 $1.08 $1.13

2011 2012 2013 2014 2015

EPS Dividend Plowback

Page 33: Kraft report

33

APPENDIX Y – KEY RATIOS

For the Fiscal Period Ending 12 months

12/31/08

12 months

12/31/09

LTM

12 months

12/31/10 2011 2012 2013 2014 2015

Profitability

Return on Assets % 4.9% 5.4% 5.2% 4.0% 4.5% 4.8% 5.0% 5.1%

Return on Equity % 7.4% 12.5% 9.3% 10.2% 11.0% 11.3% 11.3% 11.3%

EPS 2.12 2.40 2.58 2.70 2.82

Margin Analysis

Gross Margin % 33.1% 36.2% 37.2% 38% 38% 38% 38% 38%

SG&A Margin % 20.8% 22.3% 23.0% 23% 23% 23% 23% 23%

EBITDA Margin % 14.6% 16.1% 16.6% 14.5% 15.0% 15.0% 15.0% 15.0%

EBIT Margin % 12.3% 13.8% 13.9% 14.1% 14.7% 14.7% 14.7% 14.7%

Earnings from Cont. Ops Margin % 4.4% 7.5% 5.9% 7.4% 8.0% 8.2% 8.3% 8.4%

Net Income Margin % 6.9% 7.5% 9.0% 7.41% 7.96% 8.15% 8.29% 8.42%

Unlevered Free Cash Flow Margin % 7.6% 10.5% 7.9% 9.26% 9.49% 9.50% 9.77% 9.78%

Asset Turnover

Fixed Asset Turnover 4.1x 3.9x 4.0x 3.6x 3.7x 3.8x 3.8x 3.9x

Accounts Receivable Turnover 8.5x 8.2x 8.9x 8.0x 8.0x 8.0x 8.0x 8.0x

Inventory Turnover 7.0x 6.7x 6.1x 5.2x 5.2x 5.2x 5.2x 5.2x

Short Term Liquidity

Current Ratio 1.0x 1.1x 1.2x 1.0x 1.1x 1.1x 1.1x 1.1x

Quick Ratio 0.5x 0.6x 0.6x - - - - -

Avg. Days Sales Out. 43.2 44.7 41.1 45.0 45.0 45.0 45.0 45.0

Avg. Days Inventory Out. 52.0 54.2 59.8 69.0 69.0 69.0 69.0 69.0

Avg. Days Payable Out. 48.9 50.7 48.5 62.0 62.0 62.0 62.0 62.0

Long Term Solvency

Total Debt/Equity 90.8% 73.4% 87.0% 80.4% 74.7% 69.1% 63.7% 58.5%

Total Liabilities/Total Assets 64.7% 61.2% 62.7% 64.0% 63.6% 63.4% 63.1% 62.9%

EBIT / Interest Exp. 4.0x 4.4x 4.2x 3.9x 4.3x 4.7x 5.0x 5.3x

EBITDA / Interest Exp. 4.8x 5.2x 5.0x 4.0x 4.4x 4.8x 5.1x 5.5x

RATIOS

Page 34: Kraft report

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APPENDIX Z – MARKET CAPITALIZATION

Current Capitalization (Millions of USD)

Currency USD

Share Price as of Dec-06-2010 $30.29

Shares Out. 1,746.8

Market Capitalization** 52,909.8

- Cash & Short Term Investments 2,372.0

+ Total Debt 30,362.0

+ Pref. Equity -

+ Total Minority Interest 102.0

= Total Enterprise Value (TEV) 81,001.8

Book Value of Common Equity 34,880.0

+ Pref. Equity -

+ Total Minority Interest 102.0

+ Total Debt 30,362.0

= Total Capital 65,344.0

Valuation Multiples based on Current Capitalization

For the Fiscal Period Ending 12 months

12/31/06A

12 months

12/31/07A

12 months

12/31/08A

12 months

12/31/09A

LTM

12 months

09/30/10A

TEV/Total Revenue 2.4x 2.3x 1.9x 1.7x 1.7x

TEV/EBITDA 14.2x 14.5x 13.3x 10.7x 10.3x

TEV/EBIT 16.6x 17.1x 15.7x 12.5x 12.3x

P/Diluted EPS Before Extra 17.7x 19.5x 25.0x 14.9x 17.9x

P/BV 1.7x 1.7x 2.0x 1.7x 1.5x

Page 35: Kraft report

35

APPENDIX AA – KEY EQUITY MULTIPLIERS

KRAFT KEY EQUITY MULTIPLIERS

Multiples Detail

For Quarter Ending: Mar-31-2010 Jun-30-2010 Sep-30-2010 Dec-06-2010

TEV/LTM Total Revenue 1.52x 1.79x 1.80x 1.77x

1.74x 1.88x 1.86x 1.86x

1.45x 1.68x 1.73x 1.70x

1.71x 1.78x 1.79x 1.70x

TEV/LTM EBITDA 9.61x 11.04x 10.89x 10.66x

10.79x 11.86x 11.41x 11.16x

9.06x 10.44x 10.38x 10.23x

10.64x 10.94x 10.79x 10.25x

TEV/LTM EBIT 11.19x 12.93x 12.86x 12.69x

12.59x 13.87x 13.39x 13.24x

10.57x 12.19x 12.31x 12.23x

12.42x 12.83x 12.79x 12.25x

P/LTM EPS 15.91x 16.06x 16.94x 17.93x

18.06x 17.47x 18.00x 18.78x

13.98x 14.51x 15.91x 17.42x

14.87x 16.01x 17.39x 17.89x

P/LTM Normalized EPS 16.11x 15.98x 15.68x 16.29x

16.89x 17.67x 16.80x 18.43x

15.41x 14.83x 14.73x 15.83x

16.59x 14.83x 16.05x 15.88x

P/BV 1.68x 1.58x 1.55x 1.60x

1.76x 1.77x 1.67x 1.70x

1.61x 1.37x 1.41x 1.51x

1.73x 1.42x 1.62x 1.52x

P/Tangible BV NM NM NM NM

TEV/LTM Unlevered FCF 14.25x 14.71x 14.52x 18.35x

16.53x 16.64x 15.57x 21.94x

13.17x 13.29x 13.24x 15.24x

16.30x 13.29x 15.21x 21.55x

Market Cap/LTM Levered FCF 12.52x 12.28x 11.39x 15.64x

15.43x 15.56x 12.62x 19.61x

11.09x 9.98x 9.92x 12.22x

15.15x 9.98x 12.19x 19.09x

Page 36: Kraft report

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APPENDIX BB - KRAFT DEBT SCHEDULE

KRAFT DEBT SCHEDULE (as of fiscal year end 2009) Amount

(USD mm)

Reported

Cpn Rate Weighted Avg Cpn Type Maturity

Seniority

500.0 6.750% 0.189% Fixed 2014 Senior Unsecured

2,000.0 5.625% 0.629% Fixed 2011 Senior Unsecured

800.0 5.250% 0.235% Fixed 2013 Senior Unsecured

750.0 6.000% 0.252% Fixed 2013 Senior Unsecured

1,000.0 6.875% 0.384% Fixed 2038 Senior Unsecured

750.0 6.875% 0.288% Fixed 2039 Senior Unsecured

1,500.0 6.250% 0.524% Fixed 2012 Senior Unsecured

250.0 5.625% 0.079% Fixed 2010 Senior Unsecured

1,500.0 6.500% 0.545% Fixed 2017 Senior Unsecured

1,250.0 6.125% 0.428% Fixed 2018 Senior Unsecured

750.0 6.500% 0.272% Fixed 2031 Senior Unsecured

750.0 7.000% 0.293% Fixed 2037 Senior Unsecured

2,000.0 6.125% 0.685% Fixed 2018 Senior Unsecured

1,220.0 6.250% 0.426% Fixed 2015 Senior Unsecured

2,870.0 5.750% 0.922% Fixed 2012 Senior Unsecured

17890.00

6.15% = KFT Weighted Avg Interest Rate on

Debt

APPENDIX CC – NOTES TO WACC CALCULATION

Risk-Free Rate

Risk-Free Rate: 4.25% This represents the 30-year U.S. Treasury per the Federal

Reserve Board Release H.15 Dec 7, 2010.

Market Risk Premium

Market Risk Premium: 5.52 (9.77-4.5%)

Expected Return of Market: 9.77%; we used the 30-yr history average return

on the MSCI World Index

RFR = 4.25% as stipulate above

Page 37: Kraft report

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APPENDIX DD - BETA CALCULATION: KRAFT

BETA CALCULATION

Beta: 0.54 Beta was calculated using weekly returns for Kraft for five years regressed against

the MSCI World Index. The MSCI World Index was selected due to the global nature of Kraft’s

business. Kraft’s levered beta is calculated to be 0.59. We derived Kraft’s unlevered beta using a

debt-to-equity ratio of 73.39% to eliminate differences in capital structure. Kraft’s unlevered beta

is calculated at 0.54, slightly below the average of its competitors, but in close proximity to the

group’s average.

APPENDIX EE – BETA CALCULATION: COMPARABLES

Company Equity (Mkt Cap) Debt D/E Tax Rate Levered Beta Unlevered Beta

Kraft $53,521.00 $30,035.00 56.12% 29.4% 0.59 0.54

Nestle $190,921.00 $34,791.00 18.22% 26.1% 0.52 0.59

Coke $148,935.00 $13,393.00 8.99% 25.0% 0.56 0.68

Pepsi $102,508.00 $24,201.00 23.61% 27.2% 0.48 0.54

Danone SA $30,530.00 $8,473.00 27.75% 21.0% 0.70 0.69

Heinz $15,713.00 $4,452.00 28.33% 27.8% 0.61 0.65

0.62

Unlevered Beta = Levered Beta/[(1+D/E)*(1-tax rate)]

NOTE: Selected comparables include manufacturers and marketers of food and beverage products

with an international customer base.

y = 0.5919x + 0.0003

R² = 0.3075

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.25 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15

Regression: KFT, Mkt (Levered β)

Page 38: Kraft report

38

APPENDIX FF - BETA CALCULATION: COMPETITORS

y = 0.6962x + 0.0006

R² = 0.3354

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.3 -0.2 -0.1 0 0.1 0.2

Regression: Danone, Mkt (Levered β )

y = 0.5589x + 0.0017

R² = 0.364

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

-0.3 -0.2 -0.1 0 0.1 0.2

Regression: Coke, Mkt (Levered β )

y = 0.5194x + 0.0014

R² = 0.2723

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.3 -0.2 -0.1 0 0.1 0.2

Regression: Nestle, Mkt (Levered β)

y = 0.6059x + 0.0014R² = 0.4118

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.3 -0.2 -0.1 0 0.1 0.2

Regression: Coke, Mkt (Levered β)

y = 0.4831x + 0.0004

R² = 0.2993

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-0.3 -0.2 -0.1 0 0.1 0.2

Regression: Pepsi, Mkt (Levered β)

Page 39: Kraft report

39

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2010. Web.

Bellis, Mary. “Kraft Foods - The History of Kraft Foods.” About.com. n.d. Web.

Bhushan, Ratna. “Kraft Seeks Manufacturing Allies in India.” The Economic Times. 26 July 2010. Web.

Caul, Mhunna. Personal Interview. November 2010.

Coca-Cola Company Annual Report. 2009. 26 February 2010. <http://www.thecocacolacompany.com/>

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Web.

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Web.

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Jargon, Julie. “Kraft Reformulates Oreo, Scores in China.” Wall Street Journal. 1 May 2005.

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