The uncertainty surrounding Sara Lee grows by the week and, in recent days, has intensified with reports that Brazilian meat giant JBS has made a takeover bid for the US food group.
According to Bloomberg, Sara Lee, which has held talks with JBS for a number of weeks, turned the offer down, deeming it too low.
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The exact details of JBS’s offer are unknown but reports have suggested that the level of the bid was below the intraday high of Sara Lee’s share price on Friday (17 December) – $17.62 – the day when the Wall Street Journal reported the talks that had taken place between the two sides. That day, Sara Lee’s shares closed at $17.26, valuing the business at around $11bn. As you’d expect, neither JBS nor Sara Lee have made any public comment.
The reported JBS bid is, by some accounts, not the first to have been made for the whole of Sara Lee this year. In October, The New York Post reported that a $12bn bid from private-equity firm KKR had been turned down.
Sara Lee’s future has been the subject of speculation for much of 2010. Sara Lee’s bakery operations in North America – dubbed by one analyst as the group’s “achillees heel” – were at the centre of takeover talk for much of the summer before they were sold in November to Mexico’s Grupo Bimbo for $959m.
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The announcement in August that chairman and CEO Brenda Barnes would step down due to ill-health added to the rumour mill (as has Sara Lee’s inability thus far to find a replacement for Barnes).
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By GlobalDataSara Lee said the bakery deal with Bimbo would enable it to focus on meats and coffee and, since then, the US group has announced plans to buy Brazilian coffee business Damasco. However, Sara Lee is still widely held to be a takeover target and the reports of JBS’s interest are likely to be just the latest speculation that will continue to surround the business.
JBS’s reported interest in Sara Lee does make strategic sense. Sara Lee’s convenience meats business, including the Jimmy Dean brand, could be supplied by JBS’s slaughtering operations.
However, whether JBS could finance an acquisition of Sara Lee is open to question. JBS’s market capitalisation falls slightly below that of Sara Lee, meaning the Brazilian firm would have to take on more debt to buy the business. And, after a series of major acquisitions since 2007, there is uncertainty over whether JBS’s balance sheet is strong enough to make the deal.
There is, so close to Christmas, little chance of clarity over Sara Lee’s future before 2011. Despite KKR’s and JBS’s reported failed bids, Morningstar analyst Erin Swanson believes Sara Lee remains a takeover target. Swanson says the company is “vulnerable” to bids from “strategic and financial suitors”, particularly as its direction remains uncertain without a permanent successor to former chairman and CEO Barnes.
“Beyond looking to sell the combined business, Sara Lee could also sell the meat and beverage businesses separately,” Swanson explains. “Under such a scenario, we would expect the higher-margin beverage business to garner an EBITDA multiple in the low teens, above the mid- to high-single-digit multiple we would expect the commodified meat business to yield.”
However, Swanson and Morningstar have set a “fair value estimate” on Sara Lee’s shares of $15 a share, below the level at which the stock has traded in recent days. At 15:10 ET today, Sara Lee’s shares were down 1.2% at $17.48.
Swanson suggests a deal around that level would see a buyer pay too much for the business. “While an acquisition may ultimately be agreed upon at a level around the current market price, this would represent a substantial overpayment,” Swanson argues. “As a result, we don’t expect a bidding war to ensue. The sale of the bakery business may deter private-equity firms looking to buy the consolidated business cheaply and sell off its under-performing business lines, but we believe a number of firms are looking to put excess capital to work in the consumer sector through acquisitions.”
JBS, then, could just be the latest company to indicate its interest in the US food group.
