Glenboden M & A Originations

Potential acquirors for Sara Lee’s international bakery business

Priority Rating priority rating 4
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Origination Status proprietary origination, March 2009
Asset Sara Lee’s international bakery business
Buyer candidates include Kraft, Aryzta, Lantmannen, Grupo Bimbo
Seller Sara Lee Corp. (USA), global branded consumer products maker
Buyer Rationale synergies, brands, scale, global reach, portfolio development
Seller Rationale strategy of exiting low-growth, low-margin, uncompetitive businesses
NBs Sara Lee rumoured to already be in process of finding buyer for its non -food businesses
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Sara Lee has been reported as trying to sell its international household and body care division, with help from Goldman Sachs. Arguably an easier business for that troubled group to divest would be its international bakery division, which is smaller, more of a drag on profitability and in a category with a number of international buyers at this time. We look at rationale and selected potential buyers.

Sara Lee’s international bakery business is arguably the weakest in the group’s portfolio. With sales revenue of just over US$ 800 mln in 2008, it contributes less than 10% of the group’s total turnover, and is loss-making or barely profitable on an underlying basis. It’s also in decline in revenue terms, and even more so in volume terms, and is forecast to decline by a further 5% in FY 2009.

So, this business unit meets the exit criteria, laid down in Sara Lee’s strategic growth plan announced in late 2008, more than any other of the group’s divisions, in terms of under-performance and weak competitive prospects as a stand-alone portfolio. On the other hand, it includes a number of brands that could enhance the business model of some of the ambitious international bakery products acquirors, such as Aryzta, Lantmannen (Unibake), Grupo Bimbo or even Kraft.

Formed from the merger of IAWS of Ireland and Hielstand of Switzerland in 2008, Aryzta AG claims to be the global leader in specialty baked products and convenience food, with total revenues of € 3 bln in 2008. In H1 2009, the group grew its top line by over 15%, and its operating profit by 20%.

The Sara Lee bakery business would boost Aryzta’s flagging growth rate in Europe, where sales were flat in this period. Synergies will also help to push up the group’s EBITDA margin above the current 10%. On the other hand, after making a string of acquisitions the group’s net debt ratio is x2,5 EBITDA, so funding such a large deal might be problematic.

One-third of the size of Aryzta, but equally ambitious in its target to be a global bakery leader, is Cerealia Unibake, part of the giant Lantmannen co-operative in Sweden. Already producing in 19 countries across Europe, USA, Russia and Asia, the group is growing quite fast, with its top-line increasing by nearly 20% in H1 2008, to reach about € 400 mln.

It also completed three international acquisitions in 2008– Baco in Finland, Eurobuns in the UK, and Euro-Bake in the US – and continues to have an appetite for companies that bring new markets, segments or know-how.

By acquiring the Sara Lee business, Unibake would nearly double its scale. It would also transform itself into a significant producer of branded sweet pastry products, since 80% of its sales so far are in fresh or frozen breads and only about 20% in pastry. Funding might also be an issue, given the co-operative model of Unibake’s mother company.

Grupo Bimbo is the leading bakery products group in Mexico, south America and, after its acquisition of Dunedin from Weston Foods in 2008, in the USA also. Having grown by 30% in three years, to reach US$ 6 bln in sales revenue in 2008, the group grew by another 30% after the Dunedin purchase. It can now be described as truly pan –Americas, with one-third of sales derived outside its native Mexico.

With an EBITDA margin of 12%, Bimbo's it at a similar level to both Aryzta and Unibake, which could be enhanced by the Sara Lee acquisition, given the scale and international reach of that business. However, the Dunedin deal saw Bimbo's net debt ratio shoot up to x3,3 EBITDA, which might put a damper on ambitions for the next year or two.

The mighty Kraft Foods could outbid all of the above companies, if it wanted to acquire Sara Lee's bakery division. Biscuits are one of the group’s five core categories, after its acquisition of LU in 2007, and after its divestment programme in the last five years, and Sara Lee's portfolio can be said to be highly adjacent to biscuits.

Kraft's enthusiasm for this category is underlined by the performance of one of its top brands, Oreos, which grew sales by 22% globally in 2008.

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THIS LEAD'S VALUATION
Size (€ mln) 600
Sector bakery products
Asset Quality international branded
Seller large plc
Buyer large plc
P/S 1,0
P/Ebitda n/a
Type value estimate
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