January 27, 2011 / 6:05 PM / 9 years ago

Sara Lee to split coffee, meat units: source

NEW YORK/PHILADELPHIA (Reuters) - Sara Lee Corp SLE.N plans to split up rather than sell itself, a source familiar with the situation said on Thursday after the company failed to win lucrative enough bids from potential buyers.

Going down a tax-free split-off route raises the prospect there may be takeover bids for the units — meat and beverages — post split.

The U.S.-based food and beverage company has for months been examining options, including a spin-out or outright sale. It has been functioning with an interim chief executive since May, when former CEO Brenda Barnes suffered a stroke. Barnes left the company in August.

Two bidding groups recently emerged — a private equity consortium led by Apollo Management LP APOLO.UL and one led by Brazil’s JBS SA (JBSS3.SA), the world’s biggest meat company. Both have so far failed to produce bids that would win over Sara Lee.

The Apollo-led group has decided against pursuing Sara Lee after its bid of nearly $13 billion was rejected, a second source said.

JBS meanwhile has been struggling with financing to make a higher offer, the second source said. The JBS offer had a private equity component — Blackstone Group LP (BX.N) was likely to buy Sara Lee’s beverages unit from JBS if it had been successful, a separate source previously told Reuters.

It was unclear whether the two bidding groups could reemerge with higher offers.

Sara Lee had indicated to bidders it would seriously consider a bid of roughly $20 per share to continue talks with a suitor, a separate source familiar with the situation said previously.

Edward Jones analyst Jack Russo said Sara Lee shareholders could feel as if they will be missing out on money because the board was asking for too much. Some analysts said Sara Lee would be worth as much as $23 a share in a takeover.

But a spin-off, which could be done in a tax-free manner, has been seen by observers as a better route from a pure tax point of view than selling parts or perhaps even the whole business.

“This gives them a really good chance to sell the company to multiple buyers without incurring tax liabilities,” said Robert Willens, who runs his own tax and accounting service, Robert Willens LLC. “It is something they almost had to do.”

Sara Lee said in a statement it will update investors on its strategy on a call tomorrow at 9am CST (10am EST). It declined to comment on the process on Thursday.


The meat and coffee units could attract bids post spin-off.

However, bidders who have already had substantial negotiations to buy parts of Sara Lee may find it prohibitive to bid for at least a year, tax experts said.

Their bids may be treated as part of a plan meaning they could be hit with a high tax bill, those experts said.

Blackstone may be able to get around that, if it decides to bid for the beverages unit. It was talking to JBS about the possibility of buying the beverage business, but not Sara Lee itself, a source familiar with the situation said.

“I would say it would not be a problem if the talks took place between Blackstone and JBS,” said Willens. “The substantial negotiations that are prohibited are those that take place between the acquirer and the distributing company (i.e. Sara Lee).”

Sara Lee’s largest and most profitable unit is its international beverages business, whose coffee and tea brands include Senseo and Douwe Egberts.

Its second-biggest unit sells packaged meats, including Jimmy Dean sausages. It has a substantial North American fresh bakery unit that is being sold to Mexico’s Grupo Bimbo (BIMBOA.MX).

Other large companies that operate in the same space as Sara Lee include Kraft Foods Inc KFT.N and J M Smucker Co (SJM.N) on the coffee side, and Tyson Foods Inc (TSN.N) and Smithfield Foods Inc SFD.N on the meats side.

A break-up of Sara Lee would be the latest example of large conglomerates splitting apart — including Fortune Brands Inc FO.N and ITT Corp (ITT.N).

Sara Lee shares hit a low of $17.11 and closed down 4.75 percent at $17.64 on the New York Stock Exchange.


If the private equity group had succeeded with their bid, it would have been the largest leveraged buyout since the credit crisis, according to Thomson Reuters data. The Apollo-led consortium also included TPG Capital LP TPG.UL and Bain Capital.

Private equity firms are sitting on mountains of cash raised during better times. While deal values have been increasing, there has not yet been a mega-deal that compares with the $40 billion-plus size deals reached in 2006-2007.

A number of potential deals have faltered for price reasons. One source familiar with the situation said earlier in the week that financing was not an issue for the Apollo-led bid.

Apollo, Bain and TPG declined to comment. JBS could not be immediately reached for a comment.

The sources declined to be named because the talks were not public.

Additional reporting by Martinne Geller; editing by Andre Grenon, Steve Orlofsky and Maureen Bavdek

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