The Dominion Bond Rating Service Ltd (DBRS) has updated its benchmark report on the US-based multinational Sara Lee Corp.

The food and consumer goods giant is the global leader in packaged meats, and the US leader in frozen baked goods and underwear.

In May last year, Sara Lee revealed to investors a major reshuffle plan which would see the divestiture of several of its non-strategic divisions in a bid to enable a focus on high growth, higher margin core categories. Since then, DBRS explains, the sale of about 20 businesses (that accounted for 20% of the company's F2000 sales) bought in net proceeds of US$3bn. From this, Sara Lee paid US$1.3bn to reduce debt, and repurchased over US$500m worth of its own shares.

Furthermore, DBRS points out that the recent divestments and rising competitive pressures (price cuts) resulted in the 2001 EBIT margin falling by 1% (equivalent to US$154m). For the full year, DBRS says that operating cash flow declined by US$180m but that this was still sufficient to cover the internal requirements during the year.

The company has identified bakery as a key strategic area for growth; and while its attempt to acquire the Bestfoods bakery business failed, Sara Lee recently acquired Earthgrains for US$2.9bn and secured its position as the second largest fresh bread bakery in the US, with combined sales of nearly US$3.4bn. The debt funded acquisition of Earthgrains has hurt the company's financial profile, however, says DBRS.

DBRS warns that "the balance sheet is under some pressure as net debt in the capital structure has risen to a high level of 85%, and pro forma cash flow to total debt, although still respectable, has declined to 0.23 from a pre-acquisition level of 0.36".

It also points out that the company faces considerable challenges over the next few years. Not least in the corporate re-profiling and centralizing of management, Sara Lee also faces intense industry competition and the economic slowdown, leading to weak commodity prices that will affect many of its businesses.