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Sara Lee poised for breakup, investors believe

With its stock price up nearly 50% over the last year, the worst thing that could happen for shareholders, at least in the short term, is for the company to do nothing, analysts say.

January 04, 2011|By Emily Bryson York

Investors are betting that Sara Lee Corp. will be broken up or sold in the coming months.

With its stock price up nearly 50% over the last year, closing at $17.41 on Tuesday, the worst thing that could happen for shareholders, at least in the short term, is for it to do nothing, analysts say.

"It's trading at a very high multiple, which implies it's a potential takeout," Erin Swanson, an analyst with Chicago-based Morningstar Inc., said Monday.

Sara Lee's price-to-earnings ratio is nearly twice that of some its peers, which means that the market has factored in the possibility of a takeover, or sale of additional business units, into the stock price. Now, if nothing happens, the share price would likely go down.

Swanson added that the absence of a permanent chief executive since Brenda Barnes took a leave of absence after a stroke in May, then stepped down in August, has fueled speculation of a sale. To be fair, the Downers Grove, Ill., company's strategy of slimming down through divestitures has led analysts for years to consider the possibility of an eventual breakup.

About a week ago, the maker of Jimmy Dean sausages and Sara Lee cheesecake said it would sell its household cleaning products brands in Australia and New Zealand, known as White King and Janola, to Australia's Symex Holdings Ltd. for $50 million.

Then on Friday it said it would sell its international shoe-care business, including Kiwi shoe polish, to Racine, Wis.-based S.C. Johnson & Son Inc. for $328 million. Swanson said her team had expected that business to sell for at least $450 million.

In October, Sara Lee agreed to sell its North American bakery to Mexico City-based Grupo Bimbo for $959 million. Last month, Sara Lee closed the sale of its household- and body-care business to Anglo-Dutch consumer-goods giant Unilever for $1.6 billion.

Sara Lee reportedly has received buyout offers from private-equity firms as well as Sao Paulo, Brazil-based JBS, the world's largest meat processor. In all cases, talks were rumored to have stalled over price. A JBS spokesman declined to comment. A Sara Lee spokesman also declined to comment.

In a research report, Credit Suisse analyst Robert Moskow estimated Sara Lee's market value at about $12.5 billion.

Industry analysts underscore that Sara Lee is inefficiently structured. The company's European coffee business, for instance, is highly profitable but heavily taxed when proceeds are repatriated in the United States. This problem is often cited as a reason for splitting the company in two, meaning as a Chicago-area food company and a European coffee company.

Some shareholders appear supportive of a breakup or sale. Michael McCauley, senior officer of investment programs and governance at the Florida State Board of Administration, said that though his organization is a long-term investor, "If you can get more money now as opposed to waiting 10 to 15 years to equal that payout, we're, of course, more interested in that."

Many analysts have expressed skepticism about JBS as a buyer for all of Sara Lee. In a research note, Kenneth Zaslow, of BMO Capital Markets, wrote that "while anything is possible," it seems "unlikely" that JBS will buy the entire company. He cited the Brazilian company as a likely acquirer of the meats business in the event of a breakup.

Zaslow said that if Sara Lee's business were broken into parts, with the European coffee business sold to one buyer and the North American meat business sold to another buyer, the company could fetch $23 to $24 a share, or up to a 37% premium over Monday's share price of $17.48.

Morningstar's Swanson said Sara Lee's recent divestitures may indicate that the company is pursuing a breakup. Private-equity players like to sell off underperforming businesses themselves, she said. Sara Lee's sales of its North American bakery business and international shoe-care business, she added, may make Sara Lee less attractive to private equity.

In a December research note, Sanford C. Bernstein & Co. analyst Alexia Howard interpreted the departure of two top investor relations employees as a sign the company may have been looking to sell itself or be taken private. If Sara Lee names a CEO with operational experience, she added, it's likely the company plans to move forward.

However, "if [interim CEO Marcel Smits] is kept, we believe that a breakup scenario or privatization is somewhat more likely to happen," she wrote. Smits has been serving as interim CEO since May.

York writes for Tribune.

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