US CREDIT-Sara Lee, Black & Decker debt may weaken
NEW YORK, Jan 16 (Reuters) - Consumer products companies Sara Lee Corp. (SLE.N) and Black & Decker Corp. (BDK.N) are among the companies seen as most likely to pursue aggressive strategies to raise their share price at the expense of their bondholders in 2007.
Bank of America analysts recently named Sara Lee's debt as one of their top sells for 2007, due to potential event risk.
Analysts at Barclays Capital also named both companies in their 2007 consumer products outlook as likely to see their debt underperform "due to event risk, as well as deteriorating fundamentals."
One of the largest fears for bondholders is that the companies may be acquired in leveraged buyouts, which typically sends their debt ratings into junk territory.
Black & Decker makes an attractive LBO candidate due to its low valuation, strong brand names, steady cash flow generation, cost savings opportunities and potential for asset sales, said analyst Craig Hutson of independent research firm Gimme Credit.
Activist shareholders in the company, including Pershing Square Capital Management and Atlantic Investment Management, are also likely to pressure the company to raise its share price, he said.
Black & Decker's credit default swaps widened by around 5 basis points on Tuesday to around 73 basis points, or $73,000 per year for five years to insure $10 million in debt. The swap had widened 8 basis points last week.
"We believe the existence of two activist shareholders may only make Black & Decker's struggles to address a slumping housing market more difficult," Barclays analysts wrote in their outlook.
Sara Lee, meanwhile, "has not demonstrated that its strategy of focusing on the meat, bakery, and home products categories is gaining traction with consumers," Barclays said.
"We also remain concerned that its high cash balance and poor equity returns will attract the attention of activist shareholders," they added.
Sara Lee's swaps are around 55 basis points. The swaps had widened to around 61.5 basis points last October on speculation the company may be a LBO target. For details, see [ID:nN03260695].
Gimme Credit's Hutson, however, views a leveraged buyout of Sara Lee as unlikely, arguing that valuations of the company based on its earnings before interest, taxes, depreciation and amortization (EBITDA) make it a relatively unattractive.
The company is also likely to spend much of its free cash as part of its efforts to restructure its business, he said.
