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Sara Lee ponders splitting business after takeover bids fall short

January 27, 2011|By Emily Bryson York

Wall Street is betting that Sara Lee will break in two rather than accept an outright sale offer.

Shares of the Downers Grove, Ill.-based packaged-food giant fell 88 cents, or 4.8%, to $17.64 on Thursday. The stock has slipped 7% since Monday.

After the market closed Thursday, Sara Lee announced that it would hold a webcast Friday morning to provide an update on "strategic initiatives" and its business outlook for the rest of its fiscal year. This will mark the company's first public statements about its future since speculation regarding a breakup or sale peaked last month.

The company declined to comment for this story.

"The likely outcome is that the company will be sold in one fashion or another," said Tim Calkins, a professor of marketing at Northwestern University's Kellogg School of Management. Breaking up the company may facilitate that process.

"The issue for Sara Lee is there are two very different sides to the company and the same buyer is not likely to want both of them," Calkins said. "To some degree splitting the company makes a lot of sense because you wind up with two smaller pieces that are easy to be digested by another company."

The strategy, Calkins said, "makes a lot of sense."

"You've got much more focused companies that could either get busy building the business or find a logical partner," he said.

Some analysts remain confident that additional offers, or even bidders, could emerge.

"We still think it's possible that additional bidder or an additional offer surface," said Erin Swanson, an analyst with Morningstar Inc. She added that "while anything is possible," it still seems likely that the company is headed for sale.

Reports that Sara Lee is bound for breakup could even encourage private equity bidders to boost their offers, Swanson said. However, "it depends at this point on how firm Sara Lee's belief is in the value or the price that they expect or want to get for the business and the assets." At this point, she said, it's down to "who budges," on price.

Sara Lee has been the subject of rampant sale and breakup rumors since the fall, but expectations of an imminent announcement became widespread this week.

Reports that the company had spurned offers began dragging down its stock price Wednesday. Subsequent reports that the board was leaning toward breaking up the company spurred declines Thursday.

Sara Lee stock had soared to a series of 52-week highs since December based on assumptions that the company was bound for sale. Analysts have said that the price, topping $18 a share at one point, factored in a premium for a sale. As those prospects appeared to dwindle, prices have declined.

According to reports, Sara Lee has received offers from Sao Paulo, Brazil-based JBS, the world's largest meat producer, and a consortium led by Apollo Global Management. Sara Lee's board has been ensconced in a two-day meeting to determine the course of the company's future.

Sara Lee executives have been under particularly intense pressure since August, when Chief Executive Brenda Barnes stepped down after a stroke she suffered in May.

The company has also been on a selling spree. In November, Sara Lee agreed to sell its North American bakery to Mexico City-based Grupo Bimbo. In the U.S., Bimbo owns Arnold, Thomas' and Boboli bread products, to name a few. Although Sara Lee acquired Damasco, a Brazilian coffee interest later that month, the company's efforts have seemed focused on shedding assets.

Sara Lee closed the long-planned sale of its household and body care business to Unilever, and then agreed to sell Australian cleaning products White King and Janola to Symex Holdings in late December. The same week, Sara Lee announced the sale of its Kiwi shoe polish brand to S.C. Johnson.

Once a conglomerate that made handbags, bug spray, shoe polish and bread, Sara Lee has four divisions: North American retail, including its sausage and cheesecake businesses; North American foodservice, which serves the restaurant industry; international beverage, focused on European coffee; and an international bakery division, which makes bread.

A Sara Lee breakup would mark third major breakup of an old Chicago conglomerate in two months. Deerfield, Ill.-based Fortune Brands Inc. announced plans to divide itself into three businesses in December and Schaumburg, Ill.-based Motorola Inc. split into two companies this month.

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