Sara Lee to split in two after bids fail to entice
NEW YORK (Reuters) - Sara Lee Corp plans to split into two public companies focusing on North American meats and international coffee and tea, a move that could make it easier to sell the parts.
Sara Lee announced the plan on Friday, after takeover bids were not enough to entice it to sell the whole company. The decision does not stop Sara Lee from accepting a new bid.
Sara Lee said the split should be done early in 2012 and would include a $3-per-share special dividend, to be funded with proceeds from the planned sale of its 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 Sara Lee Chairman James Crown. "We believe that the spin-off, plus the one-time special dividend, offers the greatest potential for delivering long-term shareholder value."
Two bidders recently emerged: a private equity group led by Apollo Management and one led by Brazil's JBS SA, the world's biggest meat processor. Both failed, but someone still could buy Sara Lee.
"I think you can assume that there is no reason ... why that couldn't happen," said Marcel Smits, who was named CEO on Friday after serving as interim CEO since May when former CEO Brenda Barnes had a stroke. "It's not what we're focused on. What we are focused on is executing a plan to create two pure plays."
Sara Lee shares closed down 2.7 percent, after as much as a nearly 47 percent run-up since October, when reports surfaced about private equity interest in the company.
Analysts peg much of the run-up to short-term traders, who hoped to cash in when a deal got done.
"Now that they're doing a tax-free spin of the meats business, that premium goes away for the time being because they're not going to be selling the assets in the near term," said Consumer Edge Research analyst Robert Dickerson.
However he said the move made sense from a corporate perspective because it gives the company more options for its lower-margin meats business, and allows it, over the longer term, to potentially improve the tax structure and valuation potential of the international coffee business.
Still, Sara Lee could fetch as much as $23 per share in a takeover, versus a $19 per share valuation of the break-up, said JPMorgan analyst Terry Bivens.
Stifel Nicolaus analyst Christopher Growe said splitting the company up would make the segments more attractive to buyers.
"We still believe JBS, for example, will pursue the meat business within North American retail," he said in a note.
Depending on the package, a bidder for the spun-off business could trigger a tax penalty for a period of one or two years, or none at all, Smits said.
Potential suitors could include Smithfield Foods Inc and Tyson Foods Inc on the meats side, and J.M. Smucker and Nestle on the coffee side, according to a consumer banker who declined to be identified by name. He added that Blackstone Group and other private equity firms could return to look at the coffee business.
Sara Lee 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.
Its brands would include Sara Lee desserts, Jimmy Dean sausage, BallPark hot dogs and Hillshire Farm lunch meats. That business had about $4.1 billion in 2010 revenue. Christopher Fraleigh, CEO of the North American business, will become CEO of the spun-off Sara Lee.
The other company, not yet named, would include Sara Lee's international beverage and bakery businesses, as well as the North American drinks business. Its brands would include Douwe Egberts and Senseo coffees and Pickwick tea, and would have had 2010 revenue of $4.6 billion, using 2010 exchange rates.
Analysts have long said Sara Lee was inefficient from a tax perspective because it makes most of its sales and profit abroad, then repatriates it to the United States.
Moving the legal domicile of the coffee business outside the United States was an option, Smits said.
Splitting up is the ultimate reversal of an acquisition strategy Sara Lee 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 -- with products ranging from Coach bags and Champion sweatshirts to Ambi Pur air fresheners and Kiwi shoe polish -- started to narrow its focus.
On Friday, the company lowered its 2011 earnings forecast, in part because of higher coffee costs. It expects full-year earnings of 85 to 89 cents per share from continuing operations, down from 87 to 94 cents. Analysts on average were expecting 93 cents per share, according to Thomson Reuters I/B/E/S.
In fiscal 2012, the company expects to see a benefit of 15 cents per share from share buybacks, lower pension expenses, amortization and other items.
Sara Lee shares closed down 47 cents at $17.17 on the New York Stock Exchange.