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Sara Lee Will Trim Down

Divestiture of Units and $3-Billion Stock Buyback Planned

September 16, 1997|JAMES F. PELTZ

Sara Lee Corp., a conglomerate that sells not only its namesake frozen baked goods but a panoply of other household products ranging from Ball Park hot dogs to the Wonderbra, unveiled a major restructuring Monday that it hopes will raise $3 billion over three years.

The move is the latest reorganization in a fast-changing food product business, although in Sara Lee's case, food accounts for only half of the company's annual sales.

The program is primarily aimed at paring Sara Lee's role as a manufacturer, so that it can direct resources away from production and into development and marketing of its brand-name consumer items.

The plan calls for Sara Lee to sell its yarn- and textile-manufacturing plants and possibly other production operations and embark on other, as yet unidentified cost-cutting efforts. No layoffs are planned, the company said.

Sara Lee said it plans to use the restructuring's initial cash savings to buy back at least $3 billion of its stock through periodic open-market purchases over the next three years, a huge repurchase plan that--based on current prices--would take out about 13% of its 480 million common shares outstanding.

Sara Lee's stock soared $6 a share on the news, to a 52-week high of $48.56, in heavy trading on the New York Stock Exchange, and the company's action prompted several Wall Street analysts to place Sara Lee on their "buy" lists.

"I expected some type of restructuring, but I didn't expect they'd buy back this much stock," said John McMillin, a foods analyst at Prudential Securities Inc.

Ironically, the stock's surge Monday increased the total stock market valuation of Sara Lee by nearly $3 billion--the same amount planned for its stock repurchase--to $23.3 billion.

Sara Lee's action follows restructurings recently announced by other major food companies to enhance their growth. Campbell Soup Co. last week said it would spin off seven "nonstrategic" businesses to focus on its more profitable soup, sauce and biscuit lines. And in March, H.J. Heinz Co. launched a massive reorganization that called for closing or selling 25 factories and eliminating 2,500 jobs.


Sara Lee, a 58-year-old company that was known as Consolidated Foods Corp. before it adopted its current name in 1985, operates in four industries: packaged meats and bakery items, coffee and grocery goods, household and body-care products and personal products.

Its other familiar brands include Hanes, L'eggs and Sheer Energy hosiery; Playtex bras; Kiwi shoe polish; Brylcreem hair products; Jimmy Dean and Hilshire Farm packaged meats; and Champion apparel.

Sara Lee isn't undertaking the restructuring because it's in dire trouble. The company's profit for its fiscal year ended June 28 rose 10% from the prior year, to $1 billion, on a 6% sales gain to $19.7 billion. It has also earned a sound 20 cents or more for each $1 of its stockholders' investment for the last two years, and isn't burdened with excessive debt.

"It's been a very well-run company for the last 20 years," said Timothy Ramey, analyst at the investment firm Deutsche Morgan Grenfell.

But Sara Lee's growth and stock price have suffered somewhat from the company's conglomerate structure, analysts said. The company's far-flung holdings and its involvement in everything from manufacturing to distribution, left Wall Street convinced that some of those operations ate up too much cash relative to their growth, and so investors placed a discount on Sara Lee's stock price.


Indeed, despite the company's solid growth rates, Sara Lee's stock (before Monday's surge) had gained 25% over the prior 12 months, lagging the 35% increase of the benchmark Standard & Poor's 500-stock index.

"Clearly, some of what's going on today is meant to address that" situation, Ramey said.

Sara Lee Chairman John H. Bryan said the overhaul is intended to let Sara Lee use "skills and knowledge, not a whole lot of bricks and mortar," to better market its products and improve its returns. The manufacturing processes, he said, can be done by outside firms and "don't create a lot of profit among themselves."

But Bryan also said "there are no plans . . . to close any factories or change employment" with layoffs. Sara Lee, with facilities in 40 countries, employs 141,000 people worldwide.

For starters, Sara Lee plans to sell its U.S. yarn- and textile-production plants that support its knitted apparel lines. The company said it also is considering the sale of "certain businesses with revenues of less than $1 billion" a year, but it did not elaborate.

Analysts said other divestiture candidates include Sara Lee's hog-slaughtering operations, its food-service distribution business and a pipe tobacco operation in Europe.

The program "begins to take the conglomerate out of Sara Lee," McMillin said. "Sara Lee is still a conglomerate after this, but it's a leaner, more cash-generating conglomerate."

Sara Lee said the restructuring would result in an after-tax charge of about $1.6 billion--mainly to reflect the sale and write-down of assets that the company plans to divest--that will be applied against its fiscal 1998 results.


Bloomberg News contributed to this report.



Sara Lee Corp. shares rose sharply Monday after the consumer products conglomerate unveiled a major restructuring that will include buying back $3 billion worth of its stock over three years. The stock's weekly closes, except latest:

Monday close: $48.56

Source: Bloomberg News

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