United States - Sara Lee Offloads Dough Business; Brand Building To Drive Sales Following Split

25 Aug 2011 • by Natalie Aster

Sara Lee has reached a deal to sell its North American refrigerated dough business to US private label specialist Ralcorp Holdings for US$545mn. The move comes after Sara Lee announced plans to split its business in two, a process that will leave one firm focused internationally on coffee and desserts and a second focused in North America on processed meats. Sara Lee clearly feels that the refrigerated dough unit does not sit comfortably in either of demerged businesses and the sale can be seen as part of the firm's ongoing restructuring, through which it has become a leaner, more focused business.

This divestment is part of a pattern of sales by Sara Lee in recent years. It offloaded its North American bakery business to Mexico-based Grupo Bimbo for US$925mn, its personal care and European detergent unit to Unilever for EUR1.28bn, its Ambi Pur air care business to Procter & Gamble for US$468mn and its international shoecare business, including the Kiwi shoe polish brand, to SC Johnson for US$328mn.

Sara Lee Trading At A Premium

Forward PE Ratio For Selected Food Firms

Source: BMI, Bloomberg

Despite this restructuring, Sara Lee still looked unbalanced and in January 2011 the board agreed to split in early 2012. The move will see Sara Lee's meat businesses, which is focused on North America, split off into a new company that will have revenue of about US$4.1bn and retain brands such as Jimmy Dean, Hillshire Farm and State Fair. The remaining business, focused on bakery and coffee, will have revenue of about US$4.6bn and includes brands such Douwe Egberts and Senseo.

This strategy has been favourably received by investors, who value Sara Lee at a substantial premium to other major food firms (see chart). This is likely to be partly due to the new units being seen as potential takeover targets, but is also likely to reflect the operating advantages that the split will bring in terms of focus, capital allocation and tax. In the latter, Sara Lee is seen as inefficient due to the necessary repatriation of profits from its coffee business, which is largely based in Europe.

Both of the new firms will be home to a number of powerful brands and Sara Lee appears to regard brand building as the main avenue for growth for both businesses (a strategy in line with the top developed market firms). Such a strategy does not fit with the private label focus of the refrigerated dough business and it is easy to see why Sara Lee does not see this unit fitting in either of the newly created companies.

For Ralcorp, the acquisition will enhance its strong position in the private label sector, which has seen the firm register dynamic sales growth during the US recession and subsequent sluggish recovery. The move fits with the Ralcorp's strategy of growing in this sector through purchases. In 2010, it acquired US pasta producer American Italian Pasta for US$1.2bn and also purchased two Canada-based cracker producers, North American Baking and JT Bakeries, for undisclosed prices.

Since these acquisitions, the firm's expansion strategy has been more measured but in July 2011 it announced plans to spin off its Post-branded cereals business to focus on acquisitions in the private label sector. The spin-off is likely to result in net cash proceeds of about US$1bn and has likely given Ralcorp the appetite to start spending again, with further consolidation in the private label sector likely to follow.

Related Reports:

South Korea Food and Drink Report Q3 2011;

Egypt Food and Drink Report Q3 2011;

United States Food and Drink Report Q3 2011;

Japan Food and Drink Report Q3 2011;

Qatar Food and Drink Report Q3 2011;

Russia Food and Drink Report Q3 2011;

Italy Food and Drink Report Q3 2011;

Ghana Food and Drink Report Q3 2011;

Netherlands Food and Drink Report Q3 2011;

Nigeria Food and Drink Report Q3 2011;

Singapore Food and Drink Report Q3 2011.

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