Who could acquire Sara Lee's International Bakery business ? - July 22, 2010

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Reportedly, Sara Lee is quietly trying to find a buyer for its North American Fresh Bakery business. We believe that it would be wiser to focus on selling its International Bakery unit, which is more non -core, worse -performing and more likely to find a premium buyer. We look at Grupo Bimbo and other candidates.

IB a better sale candidate than NAFB ...Sara Lee’s IB unit is arguably the weakest in the group’s portfolio, having declined in sales terms by 20% in 2009.

With revenue of about US$ 800 mln in 2009 (see chart), it contributes only around 5% of the group’s total sales, and made losses in 2008 and 2009.

Meanwhile Sara Lee's NAFB business contributes nearly 20% of sales revenue and, although in a commoditised category, is an important volume driver for the group. It's at break -even, and its sales did not decline in 2009.

So we believe that IB, more than NAFB, meets the exit criteria laid down in Sara Lee’s strategic growth plan announced in late 2008, in terms of under-performance and weak competitive prospects as a stand-alone portfolio.

... potentially strong buyer interest ...IB includes a number of brands, especially Bimbo in Spain and CroustiPate in France, that could be attractive to ambitious international bakery products acquirors at this time, notably Aryzta, Lantmannen and Grupo Bimbo.

... Aryzta needs the boost but quite indebted ...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.

Aiming to 'double its earnings base in five years', the group has a voracious M&A appetite, having acquired a string of companies in Europe and north America since formation, including Otis Spunkmeyer and Coup de Pates.

Having hit total revenues of € 3,2 bln in 2009, Aryzta's growth has now run out of steam, with sales actually declining by nearly 10% in 9M 2010, in Europe as well as globally.

Sara Lee's IB unit would double the size of the group's Food Europe division, and grow its overall business by 25%.

Negatives include Aryzta's net debt ratio which, forecast to hit x3,0 EBITDA at y/e 2010, might make funding such a large deal problematic.

Also, and in spite of synergy potential, it's possible that IB could depress Aryzta's EBITDA margin, which reached 12,5% in 2009, because its portfolio is closer to commodity bread than specialty bakery.

Unibake ambitious but financially weaker...One-quarter of the size of Aryzta, but also ambitious in terms of growth and acquisitions, is Unibake, part of the giant Lantmannen co-operative in Sweden.

The group claims to be the largest manufacturer of frozen bread products for foodservice and retail in northern Europe, and is also strong in sweet pastries.

Although on a smaller scale than Aryzta, Unibake has also completed a number of acquisitions since 2008, and continues to have an appetite for companies that bring new markets, segments or know-how.

By acquiring Sara Lee's IB business, Unibake would nearly double its sales revenue. It would also make a breakthrough in the French and Spanish markets, as most of its existing operations are in Scandinavia, the UK and the US.

Funding such a large deal might be an issue, however, given the co-operative model of Unibake’s mother company, which allows it to have an EBITDA margin of only 5%, and a net debt ratio of x5 EBITDA, and still remain in business.

In addition Lantmannen is currently facing financial challenges generated by the group's agricultural operations, and is implementing cost reductions in its business units including Unibake.

... Mexican champion as favoured acquirer ...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, it grew by another 40% in 2009, after the Dunedin purchase, to reach US$ 9 bln in sales.

It can now be described as truly pan –Americas, with over 50% of sales derived outside its native Mexico.

As nearly 90% of Sara Lee's IB's sales are in western Europe, that business could now provide a platform in another major market for Grupo Bimbo.

In addition, and thanks to an improved EBITDA margin, the group's net debt ratio was reduced to x2,0 EBITDA at y/e 2009, making a deal on the scale of Sara Lee IB financially feasible.

... Bimbo brand to return homeIronically, Sara Lee's IB business includes the Bimbo brand, market leader in packaged bread and pastries in Iberia, which originates from Grupo Bimbo in Mexico, but which since 1978 has been a wholly separate entity.

So Spanish Bimbo might have the chance to return home now.