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Analyst sees obstacles in Sara Lee sale

July 27th, 2010

Despite mounting speculation that Sara Lee Corp. is exploring the sale of its fresh baking business, a Wall Street analyst whose comments in May helped spur the speculation warned that “separating the Sara Lee bread brand from Sara Lee Corporation will be messy.”

The analyst, Robert Moskow of Credit Suisse, issued the comments 20 July in the midst of a flurry of press reports stating that Sara Lee has hired an investment banker to explore the possibility of selling the baking unit.

Contacted by Milling & Baking News last week, Sara Lee declined to comment on the reports that it has hired an investment banker or that its baking business is for sale.

“We think this is the right strategic move for Sara Lee,” Moskow said of the possibility the baking business could be on the block. “The bread business is low margin, zero-growth, and running at a competitive disadvantage in our opinion because of its high labor and benefit costs. In addition, bread has its own direct-to-store distribution network, so Sara Lee would not suffer any loss of scale with customers if it disposed of it.

“Separating the Sara Lee bread brand from Sara Lee Corporation will be messy. Sara Lee would have to license the Sara Lee brand to the buyer, and thus lose quite a bit of control over the brand equity. As a result, we think a sale process would take a long time.”

The rush of coverage began last week with a 19 July story in Crain’s Chicago Business stating that Sara Lee was looking for buyers. Other news outlets, including The New York Times, The Wall Street Journal and Bloomberg News followed with stories.

Crain’s and many of the articles last week based their stories on a 25 May investment report from Moskow in which he noted, after a meeting with Sara Lee corporate management, that the baking business was now being led by a turnaround specialist and wondered whether the parent company may be looking to sell the division. Milling & Baking News first covered the 25 May report in a 1 June, Page 1 story (see Milling & Baking News of 1 June, Page 1) that prompted inquiries at Sosland Publishing Co. from certain news outlets, including Crain’s, in the weeks that followed.

While a number of news stories specifically mentioned the largest other U.S. baking companies as potential buyers of the Sara Lee baking business, Wall Street analysts have suggested that finding a strategic buyer could be difficult.

Moskow said that a selling price for the baking business of US$1.5 billion posed by Bloomberg News as a possibility, “sounds too high.”

“Recall that Sara Lee paid $2.8 billion for the bread business in 2001,” Mr. Moskow said. “But sales have fallen to US$2.2 billion since then and EBITDA is only US$150 million. Why would anyone pay 10x EBITDA for this strategically challenged business?

“We believe private equity and Bimbo are the likely targets. We can’t imagine a scenario where Campbell’s Pepperidge Farm would ever consider it.”

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