Sara Lee buyout could pave way for JBS deal

By Reuters
Posted Jan. 13 at 5:48 p.m.

A leveraged buyout of Sara Lee could pave the way for Brazilian beef processor JBS SA to buy the U.S. company’s meat division, analysts at Bank of America Merrill Lynch said in a report Thursday.

The return on a potential LBO of Sara Lee could rise significantly if buyout firms bought the entire company and then sold its meat business to a strategic investor, as recently speculated in the media, the analysts said. JBS could pay about $4 billion for Sara Lee’s meat division, they added.

Private equity firms have pursued Sao Paulo-based JBS , the world’s biggest beef processor by revenue, since reports about a potential bid for Sara Lee arose late last year, a source with knowledge of the situation told Reuters Tuesday.

“We think if this were to happen, JBS could bid for Sara Lee’s meat division, as such an acquisition would be more feasible in size … and they would presumably not need to sell the coffee business afterward,” wrote Merrill Lynch analysts Fernando Ferreira and Isabella Simonato in the report.

Ferreira and Simonato’s remarks come after DealReporter said Wednesday that a group of buyout firms led by Apollo Global Management could bid for Sara Lee as early as this week, with a price in the range of $18.75 to $19 a share.

Spokespeople for JBS and Apollo declined to comment when sought out by Reuters. Sara Lee shares were up 10 cents to $18.28 in afternoon New York Stock Exchange dealings.

Integrating JBS’s U.S. unit and Sara Lee’s coffee and meat processing business could create value by providing a home for the trimmings of JBS’s cattle and pig slaughtering operations.

The deal could also help JBS boost its presence in processed foods, making profit margins more stable. JBS could further gain by reducing its reliance on commodities and turning into a key supplier of meats to rival food processors.

Sara Lee, which has a range of businesses that include beverages, coffee and retail units, is valued around $12.5 billion by a number of analysts.

Bank of America Merrill Lynch analysts Bryan Spillane and Mariya Goub said in a separate report that if a group of buyout firms were able to acquire all of Sara Lee and then ”simultaneously sell the meat assets to a strategic buyer, the cash proceeds could potentially enable a private equity buyer to quickly recoup a portion” of the money used for the purchase.

Investors reckon that whether Sara Lee ends up in Brazilian hands comes down to two potential deal-killers: funding and time.

JBS is significantly leveraged following more than a dozen takeovers since 2007. The purchases have catapulted the company into the big leagues as the world’s top beef producer, but left it relatively short of cash.

The source told Reuters that funding would not necessarily drag down the deal. But Ferreira and Simonato warned that financing would be a key part of any bid and that funding from Brazil’s state development bank BNDES remains a “wildcard.”

Both analysts also said JBS shares, which fell about one-third in the past year, should remain under pressure because of the potential deal.

Shares of JBS were down 1 percent to 7.05 reais in Sao Paulo near the close of day Thursday, compared with a drop of 1.1 percent in the Bovespa stock index .

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