Sara Lee to keep shrinking with bread unit sale

NEW YORK (Reuters) - Sara Lee Corp SLE.N will sell its North American bakery business to Mexico's Grupo Bimbo BIMBOA.MX for $925 million, the latest move to shrink a once-sprawling company that sold everything from hot dogs to underwear.

Sara Lee shares closed up 2.8 percent on Tuesday after it announced the deal and raised its 2011 forecast, citing the stronger euro and lower-than-expected interest expense. The news overshadowed quarterly profit that was hurt by higher commodity costs and weak sales.

The deal value, which does not include $34 million in debt that Bimbo will take on, is less than half of what Sara Lee paid for those assets and others in 2001.

Shares of Bimbo, which will become the world’s largest bread maker, closed up 4.4 percent at 101.85 pesos.

“This does mark the end of a dark chapter in Sara Lee’s history -- the $2.6 billion transaction was much celebrated back in 2001 and while that transaction included other pieces of business, this suggests a material loss for Sara Lee on that purchase,” said Stifel Nicolaus analyst Christopher Growe in a research note.

The deal will allow Sara Lee to put more emphasis on its “growth categories,” selling meats and coffee with brands like Jimmy Dean sausages and Senseo coffee pods.

But it also raises the question of whether it still makes sense for Sara Lee to stay together, said Barclays Capital analyst Andrew Lazar, since the North American meat and European coffee businesses have little overlap.

Breaking up the company may trigger a hefty tax bill, Lazar said, but could still generate shareholder returns.

He estimated that the sum of Sara Lee’s parts suggests a total value above $21 per share. Assuming a tax penalty shaved 15 percent, Sara Lee shares could be worth about $18 per share, he said.

“Still reasonable upside relative to today’s $14.80 stock price, in our view,” Lazar said.

The North American bakery unit had sales of $2.13 billion in fiscal 2010, ended July 3, out of $10.79 billion overall.

“It was not a make-it-or-break-it piece for Sara Lee,” said D.A. Davidson analyst Tim Ramey, who worked for Sara Lee when the business was bought.

Without that business, which has been pressured by higher wheat costs and supermarket discounts, Sara Lee’s operating margin will be in the double-digits, said interim Chief Executive Marcel Smits. Its adjusted margin was 9 percent in the first quarter of fiscal 2011, which ended on October 2.

Smits has run Sara Lee since May when former CEO Brenda Barnes suffered a stroke.

Sales volume fell 2 percent in the quarter as declines in the bakery business offset gains in coffee and meats.

Net income fell to $194 million, or 29 cents per share, from $287 million, or 41 cents per share, a year earlier.

Earnings from continuing operations, excluding special items, were 13 cents per share, missing analysts’ average estimate of 17 cents, according to Thomson Reuters I/B/E/S.

Net sales slipped 0.5 percent to $2.58 billion.

Because of the bakery sale, which is expected to close in the first half of 2011, Sara Lee said it will accelerate its share buyback plans. It expects to complete the repurchase of $2.5 billion to $3 billion in stock by July 2012.

The company expects 2011 earnings per share of 92 cents to 99 cents from continuing operations, up from its prior forecast of 88 cents to 95 cents.


Bimbo will have the rights to Sara Lee-branded fresh baked goods globally, except for Western Europe, Australia and New Zealand. Sara Lee will keep the right to sell Sara Lee frozen desserts and protein products, like sliced deli meats.

Over the last five years, Sara Lee has reshaped itself by dropping a number of brands.

By the end of 2010, Sara Lee expects to sell its European body care business to Unilever ULVR.L and an insecticides business to SC Johnson. It is still "actively negotiating" to sell other non-food businesses, such as Kiwi shoe polish.

Once they are done, Sara Lee will stop selling, Smits said. It will instead look to buy assets that fit its new focus.

“We have every intention of doing sensible transactions that our shareholders would actually be supportive of,” Smits told reporters. He added that deals to consolidate businesses within a particular country made a sensible starting place.

Additional reporting by Cyntia Barrera Diaz and Michael O’Boyle in Mexico City and Phil Wahba in New York; Editing by Lisa Von Ahn, Robert MacMillan and Bernard Orr