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  1. Analysis
November 12, 2010

In the spotlight: the impact of Bimbo’s Sara Lee deal

Mexico's Grupo Bimbo has snapped up Sara Lee's fresh bakery operations in North America for a cool US$959m. Dean Best discusses the repercussions of the deal on both businesses and for the wider US bakery industry.

By Dean Best

Mexico’s Grupo Bimbo has snapped up Sara Lee’s fresh bakery operations in North America for a cool US$959m. Dean Best discusses the repercussions of the deal on both businesses and for the wider US bakery industry.

President Obama has spent much of the last fortnight overseas trying to improve trade links between the US and some of the world’s fast-growing emerging markets. However, this week (9 November), there was another piece of M&A that demonstrated the shifting sands in the global economy.

Grupo Bimbo, one of the largest corporations in Mexico, itself a buoyant emerging market secured the acquisition of Sara Lee’s fresh bakery business in North America – a deal that makes the Mexican business the largest bread maker in the US.

Speculation had swirled around the Sara Lee division with the rumour mill suggesting that the US food and beverage maker had put the business on the block. In recent weeks, reports had suggested that Bimbo had emerged as the front runner in the race for a business that analysts had described as Sara Lee’s “achilles heel”, generating margins that the Jimmy Dean processed meats and Douwe Egberts coffee maker had struggled to improve.

And, on Tuesday, Bimbo announced it had finalised a deal for the business, a transaction its chief executive described as a “milestone” acquisition for the company.

The combination of Bimbo’s US arm with Sara Lee’s North American bread operations will create a business that runs 75 plants and generates pro-forma sales of $5.8bn, based on estimates for 2010.

According to Deutsche Bank analyst Jose Yordan, who upgraded his rating on Bimbo’s shares to ‘buy’ after the deal was announced, said the acquisition will increase the company’s revenues in the US by over 50% once the Sara Lee operations are integrated into the Mexican group, which is expected to take three years.

Yordan, who had been following the speculation linking Bimbo to Sara Lee’s North American bread business, said the surprise was not that a deal had been secured but the cost savings the Mexican group believes it can accrue from the integration process.

“The real surprise came from the amount of synergies that Bimbo’s management expects to extract from the combination: $150-200m by 2013,” Yordan wrote in a note to clients. Sara Lee’s territories are highly complementary to Bimbo’s current strongholds in the north-east and south-west of the United States, and given the strength and track record of the Bimbo Bakeries USA management currently in place, we have no reason to discount the stated synergies.”

The combined Bimbo Bakeries USA, or BBU, business and Sara Lee will be a force to be reckoned with in the US. “One out of every three sandwiches that are consumed in the United States are going to be made with their bread,” J.P. Morgan analyst Alan Alanis told Reuters this week.

Gary Prince, BBU’s president, highlighted the “complementary and well-recognised” brands that will be brought together by the transaction, including the Sara Lee brand and the US firm’s regional products like Sunbeam and Rainbo.

BBU’s stable includes Bimbo bread and brands like Brownberry bread and Thomas muffins, two products among a clutch the Mexican company bought last year when it finalised the acquisition of George Weston Ltd.’s US fresh bakery business.

When Bimbo first announced the Weston deal in December 2008, CEO Daniel Servitje labelled it “the most important step Grupo Bimbo has taken in its history”. The purchase of Sara Lee’s business may not have quite the same gravitas but, all the same, the deal will give Bimbo brands, manufacturing capability and distribution to strengthen its position in US bread.

The deal, for instance, will put even more pressure on US baker Flowers Foods, which yesterday blamed “continued pricing pressures and substantial promotional activity” in the sector for its decision to trim its sales and earnings targets for the financial year.

Yordan also argues the detail of Bimbo’s deal with Sara Lee will bolster the business outside the US. “The other feature that caught our attention was the fact that [the acquisition] came with a royalty-free, perpetual licence to use the Sara Lee brand for fresh baked goods throughout the Americas, Asia, Africa and Central and Eastern Europe,” Yordan said. “While the deal’s stated synergies of $150-200m relate only to the US, we believe this almost-global license leaves the door open to additional revenue opportunities in the future.”

And what of the future for Sara Lee? It has kept its bakery business in Western Europe, which according to Yordan, includes a “successful” unit in Spain. However, Sara Lee’s business is now very much predicated on meats and coffee. The sale to Bimbo is the third significant disposal (or planned disposal) at Sara Lee in the last year. As well as selling its Ambi Pur air-care business to Procter & Gamble, Sara Lee is awaiting regulatory clearance for the sale of its global body care and European detergents businesses to consumer goods giant Unilever for US$1.28bn.

Offloading a North American bread business dubbed as its “achilles heel” will come as something of a relief for Sara Lee but, as analysts in the US have pointed out, the sale raises questions about the outlook for the now smaller business.

Sanford Bernstein analyst Alexia Howard said this week that Sara Lee will be able to focus on coffee and meats – two businesses with higher margins and better growth rates thanks to innovation.

However, Howard noted that Sara Lee’s business in North America now has a “rather large” corporate centre supporting a smaller US business and, the analyst said, weighing on earnings in the near term.

And, Howard explained, with the North American bakery business being sold, what will hold the rest of Sara Lee’s business together? “At present, Sara Lee’s North American businesses need the highly profitable international beverage [division] to supply the cash to continue to restructure the North American bakery and foodservice businesses as well as the corporate centre through its Project Accelerate programme,” Howard wrote in a note to clients.

“Strategically, with the divestment of North American bakery, this begs the question of why such a sizeable corporate centre based in the US should support an even smaller US business, given that such a sizeable portion of earnings is derived from the overseas beverage business – especially since repatriating the earnings from the overseas businesses and to pay dividends is rather tax-inefficient. We believe this move could pave the way for a broader break-up scenario over the next year or two.”

Of course, this scenario is hard to predict. Elsewhere on Wall Street, there is the belief that Sara Lee’s comments in the wake of the Bimbo announcement that the company was not focusing on other disposals were not enough to convince industry watchers that the business could be broken up.

However, Barclays Capital analyst Andrew Lazar believes Sara Lee could, in the meantime, add to the businesses it has to make them more attractive in the medium term.

“Suitors are likely to be far more interested in businesses that are growing, in our view, than ones that Sara Lee is outwardly eager to divest, so why appear in a hurry to sell?,” Lazar said yesterday. “A savvy acquisition in coffee, for instance, could allow Sara Lee to garner an even higher multiple on this asset down the line as a stand-alone.”

There is much to ponder when considering the consequences of this deal both for Bimbo and Sara Lee. But, on the face of it, the Mexican group has secured an acquisition that should significantly strengthen its business north of the border.

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