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January 28, 2011

UPDATE 2: US: Sara Lee CEO Smits defends business split

Marcel Smits, the chief executive of Sara Lee, today (28 January) defended the US food group's plans to split the business in two amid questions over whether the move will benefit shareholders.

Marcel Smits, the chief executive of Sara Lee, today (28 January) defended the US food group’s plans to split the business in two amid questions over whether the move will benefit shareholders.

Smits, who also admitted today that Sara Lee had decided against pursuing “unsolicited indications of interest” from unnamed parties to buy the company, said the decision to divide the group was “in the best interests of the business and shareholders”.

The Dutchman was addressing Wall Street analysts after Sara Lee announced plans to spin off its North American grocery retail and foodservice arms into a new company, which will retain the Sara Lee name.

The second as yet unnamed company will consist of Sara Lee’s North American and international coffee and tea operations and its international bakery unit. Sara Lee estimates that the separation will be complete early next year.

Smits said the creation of two “pure-play” companies would benefit businesses that had little geographic or category overlap together.

“Pure-play companies tend to do well. Management teams in pure-play companies are closer to the market opportunities. We think that we have great opportunities for our investors to choose whether they want to invest in meats or coffee or both,” Smits said. He added that, as individual business, both groups will be in a better position to acquire or partner with groups in their respective sectors.

Smits refused to elaborate on the takeover interest Sara Lee had received from potential suitors and did not identify from where it had come. Reports have suggsted that Brazilian meat giant JBS, buy-out giant KKR and a private-equity consortium led by Apollo Global Management had made bids in recent months.

The Sara Lee chief insisted that the company’s board had spent time deliberating before coming to the decision to split the business.

“We wanted to look at it from every angle to make sure we did the right thing,” Smits said. “We have done all that we can to make sure we have come to a careful and well-informed decision.”

Many of the analyst questions focused on the tax implications of the split. Sara Lee said both companies would have a corporate tax rate of 35%.

One analyst said that it appeared that the unnamed business that will house the beverage and bakery operations could be moved and based in Europe. Smits refused to comment but said “redomiciling” that company was an option being considered to reduce that business’ tax rate.

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