Sara Lee Splitting Into 2 Businesses

Fri, 01/28/2011 - 9:18am
Sarah Skidmore, AP Food Industry Writer
PORTLAND, Ore. (AP) -- Sara Lee Corp. is splitting into two public companies, completing its evolution from conglomerate to a smaller business more tightly focused on food and drinks.

The company said Friday that the deal is the best way to provide shareholder value in the long-run. Stockholders will receive a special $3 dividend and their shares will split to give them an interest in each company.

Sara Lee, based in Downers Grove, Ill., will keep its name and current location with one company, which will concentrate on its North American retail and food service businesses. That includes brands such as Jimmy Dean, Ball Park and Hillshire Farm, as well as Sara Lee frozen desserts. These operations generated about $4.1 billion in revenue during Sara Lee's latest fiscal year.

A second company, which has not been named but is being called CoffeeCo, will focus on the company's international bakery and beverage businesses. It owns brands such as Douwe Egberts, Senseo, Pickwick, Maison du Cafe, L'OR, Cafe Pilao and Marcilla. These operations generated revenue of roughly $4.1 billion during the latest fiscal year. Sara Lee leaders said the company may base that business overseas.

The split, expected to conclude next year, will complete Sara Lee's multi-year transformation from a maker of everything from shoe polish to cheesecake into a company devoted solely to food and beverages.

Sara Lee said splitting is the next logical step after it sold its international household and body care divisions and agreed to sell its North American fresh bakery business. The company has been selling business lines for several years; those were its final major divestitures.

Sara Lee has long been considered a prime target for takeovers or a split. Its future was thrown further into question when its CEO, Brenda Barnes, stepped down last summer to recover from a stroke.

Company leaders said they considered other strategic alternatives, including takeover offers. But suitors that hoped to bid for the whole company reportedly struggled to secure the financing to make a big enough bid.

Breaking the company in two could make it more attractive for potential buyers, according to analysts, but it's unclear if tax regulation would allow a sale just after a spinoff. Company leaders said no regulations prevent a new bid for the entire company before it divides in two.

Sara Lee said its board was unanimous in its decision to pursue a split.

Marcel Smits, 49, who has been serving as interim CEO since Barnes left was named Sara Lee's permanent CEO. Sara Lee appointed Jan Bennink, 54, as its director and executive chairman and he will oversee the spinoff.

CJ Fraleigh, 47, who currently leads Sara Lee's North America business, will be CEO of the new North American retail and food-service business.

Sara Lee named Mark Garvey, 46, chief financial officer, a position he has held on an interim basis since May.

The company lowered its earnings forecast for fiscal 2011, which ends July 2, to 85 cents to 89 cents per share from 87 cents to 94 cents per share. It cited higher green coffee costs that it hasn't totally offset by raising prices, a tax matter and changes to share count and interest expense assumptions. Analysts expect 94 cents per share.

Sara Lee is one of several corporations that have split to become more focused. Motorola decided in 2008 to split in two after becoming increasingly diversified. Fortune Brands Inc. announced in December that it plans to split into three companies, keeping its liquor business and shedding the units that make Titleist golf balls, Moen faucets and Master Locks. And ITT Corp., a company that began as a telephone equipment maker in 1920 and grew into a massive conglomerate, announced this month that it will split into three publicly traded companies.

Analysts remained skeptical Friday, given the lowered forecast, remaining potential for new bids and lingering questions about the costs and benefits of splitting.

"It's sad," D.A. Davidson analyst Tim Ramey wrote in a research note. "This was once a proud $20 billion company. The legacy of the past 10 years will be to create a couple (companies) . that are not likely to trade at even $10 billion of combined value, in our view. The board felt pressured to do something and, unless we don't understand the details, it seems to have given up on its commitment to creating shareholder value in favor of just doing something."

Shares of the company have traded between $12.00 and $20.26 during the past year and fell 39 cents to $17.25 in early afternoon trading Friday.

AP Business writer Mae Anderson contributed to this report from New York

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