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Yields & Deals-Kraft IPO goes gangbusters but analyst lowers profit estimate

On June 18, net proceeds of the initial public offering (IPO) for Kraft Foods, Inc., Northfield, IL, amounted to approximately $8.4 billion. Demand was so great that orders for the 280-million share IPO reportedly exceeded supply by as much as eight times availability. The IPO opened at $31.50, topping its high-end $31 price. As of June 25, the stock price was still hovering in the $31 range, at $30.70. Kraft trades under the symbol "KFT" on the New York Stock Exchange (NYSE).

The proceeds were used to repay a portion of Kraft?s long-term notes to Philip Morris Companies, Inc., which still owns a total of 84 percent of the company. The repayment decreases Kraft?s debt-to-equity ratio from 1.84 on December 31, 2000 to 0.75 on June 30, 2001.

Meanwhile, Salomon Smith Barney, one of the lead Wall Street managers of the offering?the second largest in U.S. history?has lowered its profit estimate for Kraft. While maintaining a buy rating, analyst Jaine Mehring has indicated that the high initial price of the IPO, an extremely lucrative one for the lead analysts, has dampened earnings. However, she tempered this conclusion with the observation that accelerating volumes and strong cash flows should help Kraft to deliver "solid" earnings nevertheless.

Among factors cited by Mehring: a shift in marketing costs, higher commodity prices, and a higher tax rate. This is in addition to the impact of the December purchase of Nabisco, until savings can be achieved. Foreign exchange rates were also cited.

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