Sara Lee CEO Marcel Smits again today (8 February) outlined the benefits of the US food group splitting into two and insisted the new companies “should do very well” as separate entities.
Smits, speaking to analysts after Sara Lee announced falling underlying second-quarter profits, stood by the management’s plan to divide the company into two next year.
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Two weeks ago, Sara Lee announced it would split and create two publicly-traded businesses. One company will keep the Sara Lee name and be spun off to focus on the current group’s North American grocery retail and foodservice arms.
The second company, as yet unnamed but labelled internally as Coffee Co., will consist of Sara Lee’s North American and international beverage operations, plus its international bakery unit.
Industry watchers have questioned whether the division will bring value to Sara Lee’s investors, especially when, on the day the plans to split was announced, Smits confirmed long-running speculation and said the company had received “unsolicited indications of interest” to buy the whole business.
Smits had already fended off questions about the benefits of the split and the growth prospects for the individual businesses and today he did the same.
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By GlobalData“We are bringing two pure play [companies] to the market and pure plays tend to do really well,” Smits said. “That’s because management get to sit closer to the market, focusing on that division. A judgement call is supported by statistical analysis. If you look at how pure plays generally do, there is good statistical evidence that suggests pure play companies tend to do well. It is a function of management getting to sit really close the market, getting investors behind it that believe in the market and are willing to fund it. These are the things that lead to faster growth.”
Smits added: “We believe both companies have good sales [and] very good profitability profiles. These companies should be able to do very well and we think that we will see that coming to fruition.”
The Sara Lee CEO, who, after the split, will lead the as-yet-unnamed second company, said both entities will be “more attractive for other businesses in the industry to partner with” – although he insisted that, should the management of the two companies look for acquisitions, they will be “sensible”. He said: “You can go a long way in life avoiding doing anything stupid. They will both be very disciplined in the way they go about acquisitions.”
Smits also sought to defuse speculation over the tax implications of the split. Analysts had speculated that the ‘Coffee Co.’ business could be redomiciled to Europe to reduce the tax burden on the company.
Smits said Sara Lee’s management would “evaluate” its options but cautioned: “It’s not like the holder of a Green Card, who can move to a European country, send back his Green Card and be done with US taxation. That’s not how it works in the corporate world. Such a move would be a taxable event in the US and the taxes would be prohibitive.”
Nonetheless, the Sara Lee chief outlined a change to the holding structure to the ‘Coffee Co.’ company that could see the business redomiciled to Europe and added: “We will evaluate our most efficient capital structure and we will do so in conjunction with the decisions that have to be taken on where to base the Coffee Co. company.”
The second-quarter results of the current Sara Lee were hit by rising commodity costs. In December, for instance, hog prices were up 18% year-on-year and cattle prices were 29% higher. Smits said commodities were a “major issue” and the pressure facing Sara Lee in 2011 was worse than that in 2008, during the last spike in raw-material prices.
However, Smits said Sara Lee’s second-quarter adjusted operating income had seen a “jump” on the company’s first quarter and added the business was “confident” it would meet its annual forecast. The second half of Sara Lee’s fiscal year, he said, would feel the benefit of successful moves to increase prices in the first half of the year, while new products would contribute to sales and profits.
Shares in Sara Lee were up 1.4% at $17.16 at 15:59 ET today.
