Sara Lee Board Agrees to Divide the Company into Two Public Entities
Under the plan approved by its board, Sara Lee’s North American Retail and North American Foodservice businesses (excluding the North American beverage business) will be spun off, tax-free, into a new public company that will retain the “Sara Lee” name.
1/31/2011 --- Sara Lee Corp. announced that its board of directors has agreed in principle to divide the company into two separate, publicly traded companies. The separation is expected to be completed in early calendar year 2012. Each company will have leading consumer brands, compelling growth prospects and strong potential to deliver long-term value to shareholders.
Under the plan approved by its board, Sara Lee’s North American Retail and North American Foodservice businesses (excluding the North American beverage business) will be spun off, tax-free, into a new public company that will retain the “Sara Lee” name. Its leading brands will include Sara Lee, Jimmy Dean, Ball Park, Hillshire Farm, Chef Pierre and State Fair. The new company would have reported approximately $4.1 billion in revenue in fiscal 2010.
The yet to be named other company will consist of Sara Lee’s current International Beverage and Bakery businesses, as well as the North American beverage business. Its leading brands will include Douwe Egberts, Senseo, Pickwick, Maison du Café, L’OR, Café Pilão, Marcilla and Bimbo. This entity would have reported approximately $4.6 billion in revenue in fiscal 2010 using fiscal 2010 actual exchange rates.
Each company is projected to have an investment grade credit profile, a competitive dividend yield, a corporate tax rate of approximately 35% and future financial flexibility with a targeted gross leverage of 2.0x EBITDA.
In conjunction with the planned separation, the board of directors intends to declare a $3.00 per share special dividend on the company’s common stock, the majority of which will be funded with proceeds from the sale of the company’s North American Fresh Bakery business. The special dividend is expected to be declared and paid in fiscal 2012 and before completion of the spin-off of Sara Lee’s North American Retail and North American Foodservice businesses.
“Today’s announcement is a logical step following the divestment of our International Household and Body Care business and the announced sale of our North American Fresh Bakery business,” said James Crown, Sara Lee Corp.’s chairman of the board. “We have carefully considered various strategic alternatives, including unsolicited indications of interest in the company. We believe that the spin-off, plus the one-time special dividend, offers the greatest potential for delivering long-term shareholder value. These two pure-play companies will have their own distinct growth strategies within their respective core markets that will attract a more focused shareholder base.”
Crown added, “On behalf of the board of directors, I would like to thank the management team and our employees worldwide for their tremendous support of our business and helping shape the long-term strategic plans for Sara Lee.”
In February 2010, Sara Lee Corp. announced a revised capital plan with intent to repurchase between $2.5 and $3.0 billion of stock. The company repurchased $500 million of shares in fiscal year 2010, $765 million of shares to date in fiscal 2011 and intends to repurchase an additional $535 million of stock in the remainder of this fiscal year, for a cumulative total of $1.8 billion through the end of fiscal 2011. After payment of the $3.00 special dividend in fiscal 2012, the company will have returned a total of $3.5 billion of capital to its shareholders since the revised capital plan was announced, and, at this time, does not expect to continue with further share repurchases through the completion of the spin-off. The company expects to maintain its quarterly dividend through the completion of the separation process.
The company is developing detailed implementation plans for the spin-off and will continue to evaluate a variety of methods to enhance the efficiency of the operating structure of the two companies. Sara Lee will consult with relevant works councils during the process. The separation plan will also be subject to final approval by the board of directors, other customary approvals and the receipt of an IRS tax ruling. Further details will be disclosed at a later date.
The board of directors also announced that, effective immediately, it has appointed Jan Bennink, 54, as director and executive chairman. Bennink’s primary responsibility is the leadership and implementation of the spin-off, in addition to chairing the board of directors and building and maintaining a senior management team. Bennink replaces Jim Crown, who has served as chairman of the board since May 2010. Crown will continue on the board and will serve as lead independent director.
Bennink has extensive executive leadership experience in the food and beverage and consumer packaged goods industries. Most recently, he served as chief executive officer of Royal Numico and has also held key management positions with Groupe Danone, Benckiser Gmbh and Procter & Gamble. He previously served on the advisory board of ABN AMRO, as well as on the boards of various global companies, including Kraft Foods. He is currently a director of Coca-Cola Enterprises.
“Sara Lee has a powerful mix of iconic brands, people and potential,” said Bennink. “I am excited to serve as executive chairman of the board of directors and oversee the company’s transition into two publicly traded companies, each with exciting prospects for growth and value creation.” Also effective immediately, Sara Lee has appointed Marcel Smits, 49, as chief executive officer. Smits has been serving as the company’s interim CEO since May 2010. In his role as chief executive officer, Smits will be responsible for Sara Lee’s day-to-day operations and execution of the company’s annual operating plan
and strategy.
In addition to Bennink and Smits, the board of directors has named Mark Garvey, 46, as chief financial officer. Garvey has been serving as interim chief financial officer since May 2010. The Board has also determined that CJ Fraleigh, 47, who currently serves as Sara Lee’s chief executive officer, North America, will be named chief executive officer of the new North American Retail and Foodservice business upon completion of the spin-off.
“We are pleased to have Jan Bennink join a senior management team that has performed so well, particularly since we formed the Office of the Chairman in 2010,” added Crown.
“He brings strong food and beverage experience, a global perspective and a solid track record of creating shareholder value. The board of directors is confident that with this leadership team in place, this company will build on its past successes as it completes its strategic plan.”
On February 8, 2011, Sara Lee will report results for the second quarter of fiscal 2011. The attached table provides revisions to the previously communicated fiscal 2011 guidance. First, the guidance previously provided on November 9, 2010, was restated in order to present the results of the North American Fresh Bakery operations as discontinued operations for all periods. Second, this restated guidance was updated to reflect all information available through January 28, 2011. As customary, the guidance includes the net impact of significant items reported in the first quarter, but does not reflect any additional significant items that may occur during the remainder of the fiscal year.
After restating for North American Fresh Bakery, guidance for adjusted operating income from continuing operations was $904 to $969 million. Sara Lee is updating this range to $904 to $940 million, with the top end of the range coming down due to higher green coffee costs that cannot be fully recovered through pricing within the year. At an EPS level the guidance (after restating for North American Fresh Bakery) stood at $0.87 to $0.94 which is being updated to $0.85 to $0.89. This change reflects both the aforementioned update of the range of adjusted operating income from continuing operations as well as approximately $0.02 of adverse impact from changes in the assumption for the tax rate, as well as minor changes to the share count and interest expense assumptions.
Updated cash flow from operations in fiscal 2011 is anticipated to be between $400 and $500 million. The updated fiscal 2011 cash flow guidance includes approximately $290 million of tax payments related to the disposition of the Household and Body Care operations and the subsequent repatriation of funds. Most of this $290 million represents transaction taxes. In addition, the 2011 cash flow includes a planned $60 million, net of tax, additional contribution to the Dutch pension plan following an agreement with the Dutch Unions to restructure the Dutch pension plan. Lastly, updated fiscal 2011 cash flow guidance includes approximately $200 million for restructuring costs related to Project Accelerate and the Household and Body Care and North American Fresh Bakery divestitures.
Fiscal 2011 cash flow guidance has been reduced since November 9, 2010, as a result of the aforementioned contribution to the Dutch pension plan, higher inventory levels driven by commodity cost increases and earlier than expected payments of transaction and repatriation taxes.
Fiscal 2011 year-end cash balances are estimated to be approximately $2.8 billion and gross debt is estimated to be approximately $2.7 billion. This assumes that all announced transactions have closed and most transaction taxes have been paid, but repatriation taxes have mostly not yet been paid. As of the end of fiscal 2011, Sara Lee anticipates having a provision of approximately $880 million for taxes, mainly repatriation taxes. This relates to the disposition of the Household and Body Care business and the subsequent
repatriation of funds.
As a result of the North American Fresh Bakery operations moving to discontinued operations, operating income from discontinued operations will benefit in the remainder of fiscal 2011 from the cessation of depreciation related to that business. This benefit has been reflected in the updated guidance for discontinued operations.
Looking forward to fiscal 2012, other than operational improvements, Sara Lee will benefit from a number of tailwinds, adding a total of approximately $0.15 to the fiscal 2012 EPS for continuing operations. First, there will be a benefit from the share repurchases completed throughout fiscal 2011. Second, pension expenses, based on current assumptions, are expected to decline by approximately $40 million. Third, amortization will be reduced by approximately $30 million related to IT software and trademarks. Last, more than half of the stranded overhead related to the Household and Body Care and North American Fresh Bakery divestitures is expected to be eliminated by fiscal 2012.
