Sale would cut-short Sara Lee transformation

By Reuters
Posted Dec. 21, 2010 at 6:11 a.m.

In the past five years, Sara Lee Corp. once a hodgepodge of consumer brands, has narrowed its focus to food. But its businesses, which include Douwe Egberts coffee and Hillshire Farm deli meats, still have little in common, one reason the company has become a tempting takeover target.

Earlier this year, Sara Lee’s board rebuffed an approach by private-equity firm Kohlberg Kravis Roberts & Co. In recent weeks, it has been considering a sale of the company to Brazilian meat processor JBS SA, people familiar with the matter said.

A sale would cut short an effort launched by former Chief Executive Brenda Barnes launched five years ago, seeking to transform Sara Lee from a holding company for largely independent businesses into a more centralized and sophisticated operating company.

A Sara Lee spokesman declined to comment. JBS officials also declined to comment.

Analysts have speculated for months that the company was primed for a break-up or sale. Even as Sara Lee sold off its non-food businesses, what was left, including its highly profitable international coffee business and domestic meats businesses, seemed to offer few opportunities for synergy.

In November, Sara Lee said it would sell its North American bread business to Mexican baker Grupo Bimbo SAB for about $1 billion. Its remaining portfolio, including its international bread and dough and food-service units, functions mostly independently, and appears to offer few synergies.

With more than half of its earnings coming from overseas–much of it from the coffee business–Sara Lee has to import cash to fund the restructuring of its North American businesses and pay its dividend. In doing so, it incurs a substantial tax burden, wrote Sanford Bernstein analyst Alexia Howard, in a note to investors last week.

If the company were to stay together, executives would need to find a way to boost margins and cash flow in North America, perhaps by buying another coffee business, Howard said. Her conclusion: breaking up the company could greatly boost Sara Lee’s stock price.

“We increasingly view Sara Lee as a company whose current portfolio and geographic focus is inefficient from a tax perspective, so something has to give,” she wrote. “We see Sara Lee at a crossroads, and over the next several months, we believe we will start to see signs as to which of two routes the company is planning to take”

When Barnes took the helm at Sara Lee in early 2005, the conglomerate had dozens of brands that made everything from shoe polish to hot dogs. Each of them did its own purchasing and little, if any, hedging. She created a centralized purchasing department and helped better manage volatile commodity prices by pushing the company to buy and trade forward contracts for some of its inputs. Sara Lee also consolidated its U.S. research and development team in Illinois, concentrated marketing dollars on the biggest brands and began trying to simplify its product offerings.

Barnes set a goal of a 12 percent operating margin, which she later regretted and still has not achieved. She shed billions of dollars of businesses, outsourced various functions and launched a big cost-cutting drive.

By the time Barnes stepped down in August after having a stroke, Sara Lee had just five business units. The international coffee business had high operating margins of about 18 percent while the North American meats business, under the leadership of Christopher John “C.J.” Fraleigh, had more than doubled its operating margins to about 12 percent.

Sara Lee shares closed up 2.5 percent at $17.69 Monday.

A JBS takeover of Sara Lee would be the latest major foreign deal in the Brazilian company’s multibillion-dollar effort to gain share in markets such as the U.S. and Europe. Since 2007, JBS, whose annual revenue is around $20 billion, has acquired meat processor Swift & Co., two Smithfield Foods Inc. divisions and a controlling stake in poultry producer Pilgrim’s Pride Corp.

The deals are part of a wave of acquisitions by recently consolidated Brazilian agribusiness firms that largely dominate their markets at home and are using a strong currency and access to capital to expand abroad. By purchasing U.S. companies, JBS is seeking access to a giant market that is largely off limits to it because of U.S.-imposed restrictions. For example, Brazilian meatpackers can’t export their cuts to the U.S. because of U.S. food-safety rules, which Brazil’s cattle industry regard as largely protectionist. So JBS is setting up shop on U.S. turf, analysts say.

“The sanitary regulations are seen as protective measures in disguise, and to get around them and do business in the U.S. a meat company has to go after processors there,” said Alcides Torres, who directs the Brazilian cattle industry research firm Scot Consultoria.

JBS’s global expansion is backed partly by Brazil’s government, which provides subsidized financing for many of the nation’s largest companies through its massive development bank in a strategy to help turn Brazilian companies into important global players.

Although the strategy is backed by the government, it has attracted critics lately, who say the government is picking national champions, something the bank denies. Opposition presidential candidate Jose Serra, for example, used television appearance to criticize the use of tax-payer funded loans to help JBS purchase the then-bankrupt Pilgrims Pride. Bank officials say they are not picking national winners.

Besides the development bank, which holds a 17 percent stake in JBS, the meatpacker has other sources of financing, such as share sales and international borrowing.

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  1. XN Chicago Dec. 20, 2010 at 11:15 a.m.

    Maybe if they kick in another $10M for Brenda Barnes, they can close the deal. As a true leader, she did a heck of a job liquidating the company.

  2. Warren Buffet Dec. 21, 2010 at 8:00 a.m.

    The Bread Business goes to a Mexican Company, The Meat Business goes to a Brazilian Company and another American made icon goes down the toilet.
    What a shame!!