Sara Lee will buy US bakery products group Earthgrains in a deal worth $2.8 billion.  The combined forces of Sara Lee and Earthgrains will create the second-largest fresh bread supplier in the US. While Earthgrains’ portfolio of brands may not be as strong as Bestfoods’, they still represent significant revenues and will provide a multitude of opportunities for Sara Lee to extend its brand name and strengthen its national distribution system.

Five months after Sara Lee lost out in the bidding for Bestfoods, another acquisition opportunity has presented itself in Earthgrains, the St. Louis-based producer of fresh bakery and refrigerated dough items. Together, Sara Lee and Earthgrains will create a mighty force, with annual revenues of $3.4 billion. Sara Lee’s offer included $1.7 billion in cash and the assumption of $1.1 billion of Earthgrains’ debt, bringing the total value up to $2.8 billion.

“As a leading player in the fresh bread and refrigerated dough categories, Earthgrains is a highly strategic acquisition for our company,” said C. Steven McMillan, president and chief executive of Sara Lee. “Earthgrains is a key element in the investment phase of Sara Lee’s reshaping program as it creates a strong platform for one of our core businesses.”

The acquisition is part of Sara Lee’s plan to refocus the business around three separate segments: Food and Beverage, Intimates and Underwear and Household products. The Earthgrains business will provide Sara Lee with a range of brands in the US including Earth Grains, IronKids and Grant’s Farm and European names such as Bimbo and CroustiPate.

Earthgrains’ strong direct-store distribution system, covering 34 states and reaching 50% of the US population, will further strengthen the newly merged company. Combined, Sara and Earthgrains will reach 61% of the population. Sara Lee plans to use Earthgrains’ assets to further extend the Sara Lee brand in both existing and new product categories. Judging from its past successes in developing the name, this looks like a good route to follow.

However, the acquisition has raised some doubts. While Earthgrains does have a strong distribution network, its brands are not as well known as those of Bestfoods, which went to George Weston for $1.7 billion. Nonetheless, the opportunities for developing the Sara Lee brand are significant, and with sales slipping in several of its core frozen goods the acquisition move might be just what Sara Lee needs to revitalize its food and beverage business.

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