Sometimes Breaking Up Is the Right Thing to Do

When activist shareholder Nelson Peltz came knocking at Cadbury Schweppes – acquiring nearly 3% of the company’s equity and telling it to split up its business between confections and beverages, he created 12 points of value on a $40 basis. Over at American Standard , Fred Poses also decided to split up his company – and created instant value for shareholders.

That got Cramer thinking: Which other companies could benefit from a split? Sometimes breaking up isn’t that hard to do, and companies often thrive post-breakup (unlike us humans, who are prone to lie in bed all day, eating junk food). So Cramer picked out not one, but two companies that, if broken up, could make you a cool 25% on your investment.

The two companies Cramer thinks are in need of a good split-up: Clorox and ConAgra .

Do either of these companies have any reason to live as they are right now? Clorox – which makes everything from bleach to salad dressing - is number one or two across all its markets. But, Cramer asks, do any of them belong with one another? Clorox, the company, is like the combination of its products: something that is worth less than the sum of its parts.

ConAgra, the packaged food giant, has got plenty of brands as well, and a lot of them are hurting. It’s a failed attempt to make a sandwich out of too many ingredients, Cramer says. And it certainly wasn’t helped by the recent salmonella outbreak that was traced back to a ConAgra plant that processes Peter Pan peanut butter. The only ConAgra brand with any relevance is Redi-Whip, and that’s more for the bedroom than the kitchen, Cramer says.

But why would either of these companies, both of which are nearly 100 years old, entertain the thought of breaking up now? Look no further than the corner office – both companies are run by outsiders. Donald Knauss took the helm of Clorox last year but was at Coca-Cola for 12 years prior. Gary Rodkin, head of ConAgra since 2005, was at Pepsi for a decade. Soda guys are a special breed of “competitive, take-no-prisoners” executives, Cramer says, and they’re going to do what it takes to come out on top.

Cramer thinks that Knauss wants to move into health and wellness while shedding other brands. With private equity and other suitors waiting in the wings, he doesn’t think the Clorox chief would be against selling some of his divisions. As for ConAgra, Cramer believes people don’t have enough faith in Rodkin to turn the company around. He’s one of the finest food executives in the country, Cramer says, and he will either fix it or sell it. And while the company has been beleaguered, Cramer believes there’s still enough revenue to sell. Every brand could be on the block, he says, not just peanut butter or water filters (the latter is rumored to be on sale at CLX).

These companies have a few options, which puts them right in the sweet spot of value creation, according to Cramer. They could pull a Dean Foods by leveraging up their balance sheets and paying a gigantic dividend. Or they could sell themselves or split themselves up into three, four or five companies. They could even sell their underperforming brands to hungry private equity groups or other interested parties.

Even if neither company makes the smart move of tearing themselves to pieces, they’re both still among the least expensive packaged goods companies in the environment of a U.S. economic slowdown. So they’ll be all right, broken-up or not, until the next time the Fed cuts, which Cramer isn’t expecting until May.

Bottom Line: It worked for Cadbury and it could work for these two. A breakup with either means instant value creation. Even if they don’t do it, Cramer sees no downside in owning these two stocks.

Questions? Comments?