The Sara Lee Corp. (“Sara Lee” or “the Company”), one of the largest global branded consumer products companies, has announced plans to purchase the Earthgrains Company for cash considerations totalling $2.8 billion, including $978 million of assumed debt.
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This acquisition should have several positive results: (1) It is expected to quadruple Sara Lee’s bakery sales to more than $3.4 billion as they acquire the second-largest American bread company. Sara Lee’s Food and Beverages division will now provide more than $10 billion (near 50%) of Sara Lee’s total revenues. (2) Earthgrains brings many successful brands that can be leveraged into the Sara Lee banner. (3) Earthgrains brings Sara Lee a strong direct-store distribution (DSD) system with a network covering 34 states, and more than 50% of the American population. (4) The Earthgrains purchase bolsters Sara Lee’s European presence with strong brands in France and Spain. (5) Earthgrains’ strong presence in refrigerated dough (40% of revenues) will give Sara Lee an entry into this market.
The Company estimates the transaction will not be earnings accretive for at least one year due to integration costs and significant goodwill. Sara Lee expects to find $45 million annual cost synergies within three years through improved supply chain management and consolidated R&D and administration and $300 million in revenue synergies over five years.
The acquisition presents some challenges: (1) Despite divesting 15 businesses worth nearly $3 billion and 20% of revenue over the past few years, the acquisition will more than double Sara Lee’s current debt levels. (2) With Sara Lee currently undergoing ongoing restructuring, the possibility of the Company making additional near-term acquisitions, and the fact that Earthgrains itself is in the process of integrating an acquisition of its own, this purchase could present integration risk. (3) Many of the expected synergies come from pushing Sara Lee’s product through Earthgrains’ proprietary DSD system instead of the Company’s current warehouse system. This changeover may present significant operational difficulties.
DBRS is a Toronto-based, full-service credit rating agency established in 1976. Privately owned and operated without affiliation to any organization, DBRS is respected for its independent, third-party evaluations of corporate and government issues, spanning North America, Europe and Asia. DBRS’s extensive coverage of securitizations and structured finance transactions solidifies our standing as a leading provider of comprehensive, in-depth credit analysis. www.dbrs.com
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