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Sara Lee to split in two after bids fail to entice

Sara Lee Corp plans to split into two public companies focusing on North American meats and international coffee, a move that could eventually make it easier for suitors to buy the parts.

business Updated: Jan 28, 2011 22:56 IST

Sara Lee Corp plans to split into two public companies focusing on North American meats and international coffee, a move that could eventually make it easier for suitors to buy the parts.

The plan was announced on Friday, after takeover bids Sara Lee received were not enough to entice it to sell the company as a whole.

Sara Lee, whose shares fell as much as 2.3% in morning trade, said the split should be completed early in 2012 and would include a $3-per-share special dividend, which will be largely funded by the previously announced sale of Sara Lee's North American fresh bread business. The dividend totals $1.92 billion based on the number of shares outstanding in October.

"We have carefully considered various strategic alternatives, including unsolicited indications of interest in the company," said James Crown, Sara Lee chairman. "We believe that the spin-off, plus the one-time special dividend, offers the greatest potential for delivering long-term shareholder value."

Two groups of bidders for the company recently emerged - a private equity consortium led by Apollo Management and one led by Brazil's JBS SA , the world's biggest meat processor. Both failed to win over Sara Lee.

Stifel Nicolaus analyst Christopher Growe said he believes splitting the company in two will make each segment more attractive to suitors and allow for greater focus and efficiency in the businesses which was not possible under its former structure.

"We still believe JBS, for example, will pursue the meat business within North American retail, but the tax-free nature of this spinoff will likely lead to JBS having to wait two years due to the statutory requirements," Growe said in a research note.

Another bid for the company could also still come in before the spinoff.

"Today's action does not preclude a higher bid," said JP Morgan analyst Terry Bivens in a research note. He said he believed that Sara Lee could fetch as much as $23 per share in a takeover, versus a $19 per share valuation of the break-up.

Continental divide
Sara Lee said it plans to spin off its North American retail and foodservice business tax-free into a new public company that would retain the Sara Lee name.

That company's largest brands would include Sara Lee desserts, Jimmy Dean sausage, BallPark hot dogs and Hillshire Farm lunch meats. Along with some smaller brands, those operations had about $4.1 billion in 2010 revenue.

The yet-to-be-named other company would include Sara Lee's international beverage and bakery businesses, as well as the North American beverage business. Its brands would include Douwe Egberts and Senseo coffee and Pickwick tea, and would have had 2010 revenue of $4.6 billion, using 2010 foreign exchange rates.

It was not immediately clear where the beverage business, Sara Lee's largest and most profitable, would be headquartered or listed. Sara Lee spokesman Mike Cummins said many details were still being worked through.

Analysts have long said Sara Lee's structure was inefficient from a tax perspective, since it generates the bulk of its sales and profit abroad, but then repatriates it to the United States, where it is headquartered.

"We didn't think that the business as it stood was the most value-enhancing way to structure (it)," said Morningstar analyst Erin Swanson, noting that there was "more value inherent" in either splitting up or selling itself.

End of an era
Sara Lee named Marcel Smits as chief executive officer. Smits has served as interim CEO since May, when then-CEO Brenda Barnes suffered a stroke. Barnes stepped down last August.

The board named Jan Bennink as executive chairman, succeeding Crown, with responsibility to implement the spin-off.

Mark Garvey, who has been serving as interim chief financial officer since last May, was named to that post permanently. Sara Lee said Christopher J. Fraleigh, current CEO of the North American business, will become CEO of the new, spun-off Sara Lee.

Splitting up is the ultimate reversal of a strategy of acquisitions Sara Lee has pursued for more than six decades which saw it grow from a small wholesale distributor of sugar, coffee and tea to a conglomerate with more than $20 billion in sales.

In 2000, the company - whose products ranged from Coach bags and Champion sweatshirts to Ambi Pur air fresheners and Kiwi shoe polish - started to narrow its focus.

In 2005, under the leadership of its then-newly elected CEO Barnes, Sara Lee began a multiyear restructuring, with plans to dispose of businesses that accounted for about 40% of revenue.

The company lowered its 2011 earnings forecast, due in part to higher coffee costs that cannot be fully offset through price increases. It now expects full-year earnings of 85 to 89 cents per share from continuing operations, down from 87 to 94 cents previously. Analysts on average had been expecting 93 cents per share, according to Thomson Reuters I/B/E/S.

In fiscal 2012, the company said it expects to see a benefit of 15 cents per share, due to share buybacks, lower pension expenses and amortization, and less stranded overhead.

Sara Lee shares were down 18 cents or 1% at $17.46 on the New York Stock Exchange, off an earlier low at $17.23.