equity carve-out

Case Study

Phillip Morris's 2001 equity carve-out of a portion of its ownership in subsidiary Kraft Foods resulted in what to that time was the second largest initial public offering in U.S. history. The $8.7 billion raised from the issue of 280 million shares was second only to the prior year's $10.6 billion initial public offering of AT&T Wireless tracking stock by AT&T. Demand for the Kraft issue was strong enough to allow the managers, Credit Suisse First Boston and Salomon Smith Barney, to increase the issue price to $31 per share from an earlier estimate of $27 to $30. Kraft, owner of well-known products including Maxwell House coffee, Post cereals, and Planters peanuts, was wholly owned by Phillip Morris prior to the IPO. Subsequent to the carve-out, Phillip Morris held slightly less than 50% of Kraft's class A common stock but controlled nearly all of the firm's voting shares. Proceeds from the stock issue were to be used to reduce Kraft's immense debt, which was incurred when the company in late 2000 purchased Nabisco Holdings for nearly $20 billion.