Is Philadelphia cream cheese next for Kraft Heinz Co?

Kraft Foods Group Inc. said it will merge with H.J. Heinz Co. to form the third largest food and beverage company in North America with revenue of about US$28 billion.

Mondelez International Inc. is reportedly considering selling its Philadelphia cream cheese brand at a cost tag close to US$3 billion, and a merged Kraft Heinz Co. looks like the mostly likely buyer.

The treats giant, which was spun off from Kraft Foods Group Inc. in 2012, must provide the business to Kraft first, even though the latter doesn’t have to accept.

Unlike other grocery brands it licenses from Kraft, Mondelez owns the rights to the Philadelphia brand everywhere except Canada, the U.S. and also the Caribbean.

J.P. Morgan analyst Ken Goldman noted that Mondelez generates US$3 billion in revenue from cheese and grocery, with slightly just one third of that estimated in the future from Philadelphia (~US$900 million).

Based on discussions over the year, he believes the brand’s margins (estimated at 18%) are significantly greater than?Mondelez’s corporate average (12.9% in 2014).

Mr. Goldman also noted that separating Mondelez and Philadelphia would be a relatively easy task, since cheese and grocery is already operated separately. Philadelphia also has its own facilities which make nothing but the brand’s products.

As a result, the analyst believes that although a sale of Philly would deleverage some overhead and distribution costs, it would not result in lower utilization rates at any factories.

The move also raises the possibility that Mondelez would divest other cheese and grocery brands, including major products for example Miracle Whip, Kool Aid and Jell-O. The organization already unveiled plans to spin off its coffee business, and consistently discusses focusing on its biscuits, chocolate and gum businesses.

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