Speculation about the future of Sara Lee has reached fever pitch

Speculation about the future of Sara Lee has reached fever pitch

Speculation around the future of US food manufacturer Sara Lee has reached fever pitch in recent days, with the company's board reportedly set to meet to decide the company's future this week.

The outlook for Sara Lee has been uncertain since the departure of chairman and CEO Brenda Barnes in August last year. Takeover speculation has shrouded the business, with a number of suitors linked to the business, while the company's strategy has appeared up in the air.

Sara Lee's board is rumoured to be meeting to discuss its plans to either sell the company or break it up today and tomorrow, attention on the manufacturer has intensified, with many industry watchers hoping it will make a decision this week.

Following the sale of Sara Lee's US bakery division to Grupo Bimbo in November, which was dubbed by one analyst as the group's "achilles heel", reports have since suggested there has been bids for the rest of the business from a number of private-equity firms, as well as from Brazilian meat processor JBS.

Meanwhile, there has also been speculation that the board could decide to split Sara Lee's remaining businesses into two separate units - one for coffee and another for meats.

The speculation surrounding the manufacturer has led to a steady increase in its share price, with the stock reaching a one-year high yesterday, hitting US$26.26 a share, a 32.5% premium on the $14.82 that the shares were selling at on 9 August, the day Barnes' resignation was announced.

KKR has allegedly made bids for the manufacturer, which were reportedly deemed too low by the board, and there has been more recent speculation that the private-equity group has been barred from any possible sales discussions.

A consortium of private-equity firms led by Apollo Global Management, including Bain Capital and TPG Capital, have allegedly made an offer near $20 a share.

However, the bidder to be generating the most interest at the moment is JBS. With reported backing from private-equity group Blackstone, the company reportedly made a verbal offer at US$21 a share on Monday night (24 Janaury), with a follow-up written bid expected imminently.

According to reports, if the bid is successful, JBS would take the meat business and Blackstone would acquire the international beverage business.

The partnership with Blackstone would end concerns that JBS, which has made a number of recent acquisitions and whose market capitalisation falls slightly below that of Sara Lee, would not have a strong enough balance sheet to take on the debt to make the deal.

Morningstar analyst Erin Swanson told just-food today that it "remains unclear what decision the board will come to".

However, she suggested that a move to break up Sara Lee would be a value-enhancing endeavour.

"The individual businesses (international beverages and domestic meats) should be worth more to larger players than the firm's consolidation operations," said Swanson. "If multiple bidders emerge for the consolidated business or the individual segments, the multiple paid could be driven higher than what we believe is the value of the underlying business."

Swanson also considers the consumer product firm to be a takeover target, "particularly given that corporate oversight remains in question after CEO Brenda Barnes stepped down for health reasons in August".

The market is pricing in a takeover of the business, Swanson believes, with shares trading at between 9-10 times Morningstar's fiscal 2011 EBIDA estimate, up on the group's fair value estimate, which represents 8 times EBIDA.

While the manufacturer considers its options, interest and its share price, continue to mount.