As the conclusion to a court case against the tobacco industry brings the prospect of a Kraft spin-off from parent company Altria one step closer, investors' jitters have sent shares in the world's second largest food company tumbling down.

Altria, which is also parent of the US's largest cigarette maker Philip Morris USA, has long indicated its intention to spin-off Kraft, pending the settlement of US litigation against the tobacco industry.

The Florida Supreme Court yesterday (6 July) rejected a US$145bn punitive damage award against the tobacco industry, which a jury found had deceived smokers about the damaging effects of smoking, on the basis that the amount awarded was excessive. This has caused many to speculate that the way is now clear for Kraft to separate - causing shares in the food group to take a nose-dive.

Kraft shares on the New York Stock Exchange had dropped by 2.5%, or US$0.77, at close of trade yesterday to $30.37 - below its IPO price of £31 when the company first floated in 2001.

A spin-off will result in the distribution of approximately 1.4bn Kraft shares to Altria holders and, with Kraft's lacklustre results, some fear that this could result in the market being flooded soon afterwards.

Adding to this pressure, Merrill Lynch analyst Eric Serotta downgraded Kraft from buy to neutral, suggesting that there's a risk of another restructuring or earnings rebasing even after the company's belated progress on its restructuring plan.

However, the timing of the spin-off is uncertain. With CEO Irene Rosenfeld having recently taken the helm and further cases still hanging over the tobacco industry, many analysts have argued that Altria will delay establishing Kraft's independence for some time yet.

"We believe Altria will not proceed with a spinoff until the Kraft share price better reflects the potential operating improvements that new CEO Irene Rosenfeld may implement," Pablo Zuanic, analyst at JP Morgan Securities, said in an investor note.

Indeed, Kraft confirmed that results from the appointment of Rosenfeld may take some time to show, but the company antisipates that her leadership will ultimately aid the food group's successful spin-off.

"Irene's appointment as CEO will help Kraft accelerate the execution of our growth strategy and build value for shareholders. This appointment better positions Kraft for success when we do become a fully independent company," Perry Yeatman, Kraft's vice president of global external communications, told just-food. However, the company was unable to comment on when this spin-off might be.