Glenboden M & A Originations

What does sale of Fresh Bakery in US say about Sara Lee ?

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Origination Status buyer and seller announcements, November 2010
Asset North American Fresh Dairy business of Sara Lee (USA)
Buyer Grupo Bimbo SAB (Mexico), leading bakery products group in the Americas
Seller Sara Lee Corp. (USA), international consumer products group
Buyer Rationale consolidate leadership in fresh bakery in USA, brands, synergies
Seller Rationale focus on core beverages and protein products portfolio
NBs deal includes perpetual royalty -free rights to 'Sara Lee' brand
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Including the sale of its North American Fresh Bakery business to Grupo Bimbo, Sara Lee's group revenues will have shrunk by 33% in two years. We try to unravel the complex rationale for this deal, and understand the trajectory of Sara Lee after it.

Selling good and bad businesses ...By selling its International Household and Body Care business in 2009, and now NAFB, Sara Lee has lopped over US$ 4 bln from its pre-divestments total sales revenue of US$ 13 bln.

Ostensibly that's been to focus on businesses with the biggest operating contribution (see chart). That explains selling NAFB, with its tiny 5% margin; but IHBC, discontinued in FY2010, would've contributed US$ 254 mln (12% margin).

So Sara Lee's divestment rationale might equally be defined as financial; a need to raise money quick by selling what's sellable.

... financial imperativeThat's confirmed by Sara Lee's parallel announcements, to raise its dividend, and to implement a share repurchase programme of at least US$ 2,5 bln; all designed to boost the group's long-suffering share price.

The huge cost required to stem NAFB's decline, and restructure its 40 plants, would've impaired Sara Lee's self -liquidation process; in that sense it needed to sell NAFB to a consolidating Grupo Bimbo, even at a low valuation.

But how much further is there to go in Sara Lee's divestment process, and is there an 'irreducible core' strategy for the group itself, going forward ?

Remaining divestments ...Undoubtedly the last 'low-hanging' asset for Sara Lee to sell is its International Bakery division, given its small operating contribution (see chart), similar decline to that of NAFB, and the fact that it constitutes less than 10% of group turnover.

One potential buyer for that business in future is, again, Grupo Bimbo. IB would give that group the market leading position in packaged bread and pastries in Iberia, and a foothold in Europe.

The added frisson is that the Spanish version of the 'Bimbo' brand, originally owned by Grupo Bimbo but since 1978 wholly separate, would be 'returning home' to Mexican ownership if that deal happened.

...'irreducible core' group ? ... That would leave Sara Lee with the its three biggest operating profit contributors, as its core business.

Essentially these are coffee & tea outside the US; branded meats and frozen sweets in the US; and foodservice covering these categories in the US.

In adjusted and pro-forma terms, those three businesses together grew their operating margin to nearly 14% in 2010, from under 12% in 2009. So on that level there's hope for a sustainable Sara Lee.

... need for investment in growthOn the other hand, with a 2% top-line decline in that period, these businesses have a problem with growth.

That could be remedied with further investment behind key brands like 'Douwe Egberts' in coffee, 'Hillshire Farm' in meats, and 'Sara Lee' in frozen desserts.

The big question is whether Sara Lee, with such strong divestment momentum, won't decide that an easier option is to treat these businesses also as 'not sustainable on a stand-alone basis'.

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THIS LEAD'S VALUATION
Size (€ mln) 700
Sector fresh bakery
Asset Quality US leader branded
Seller large plc
Buyer large plc
P/S 0,5
P/Ebitda 9,0
Type enterprise value
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