Sara Lee Could Find a New Home in Brazil

One of the best-known US food brands may be for sale. The Wall Street Journal reports that Sara Lee Corp. (NYSE: SLE) is conducting talks with Brazil’s JBS SA (OTC: JBSAY) for a sale of the company to the meat-processing giant.

But Sara Lee is not about to sell itself cheap. Bloomberg reports that the company has turned down an offer from JBS, saying that the offer was too low. Sara Lee shares closed at $17.26 on Friday, and Bloomberg notes that the offer price was lower than that, although it did not say how much lower.

In just the past two months, Sara Lee has completed a sale worth $1.6 billion to Unilever NV (NYSE: UN) of the company’s body care and European detergent brands. The company also announced that it would sell it’s bakery operations to Mexico’s Grupo Bimbo (OTC: GRBMF) for $925 million, in a deal that is expected to close in the first half of 2011.

Sara Lee wants to keep its coffee and meat businesses, but as it sells off the bits of the company it doesn’t want, it is likely that the a buyer for the slimmed down Sara Lee won’t be willing to pay for the leftovers at a full-meal price. Add to that the company’s failing sales and operating income, which will certainly not boost the price. The company has missed earnings estimates in the last two quarters, and sales are not expected to grow either.

The company has acquired a Brazilian coffee business to add to its Senseo brand of one-cup coffee products. But the company trails far behind one-cup leader Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) and Nestle SA (OTC: NSRGY). Sara Lee’s meat business centers on its Hillshire Farms and Jimmy Dean brands.

Sara Lee’s share price today is roughly equal to what it was three years ago, and it has not topped $18/share since June of 2007. Shares had been trading below $15.50 for the past 52-weeks, until the sale of the bakery division was announced. And with projected sales for next year roughly equal to this year’s total of about $11 billion, growth prospects aren’t rosy either.

No wonder, then, that JSB is being cautious. Sara Lee’s market cap of just over $11 billion is approximately equal to JSB’s, and the Brazilian company is worried about its ability to get financing for such a large purchase.

JSB’s difficulties shouldn’t have any impact on Sara Lee’s value, though, unless another bidder can’t be found. And that is apparently exactly what’s happened. Previous feelers from private equity groups Apollo Global Management LLC and KKR & Co. (NYSE: KKR) went nowhere. After all, $11 billion is real money.

Since 2005, Sara Lee has divested businesses that accounted for about half its overall sales. It doesn’t make logical sense that a company that is half the size it once was is worth a share price that is identical. The entire run-up in the share price could be attributable to investors’ belief that the company will be taken over because it doesn’t have any other choice.

But JBS is unwilling and unable to pay the current asking price. No other likely suspects are waiting in the wings. Once that becomes crystal clear to investors, Sara Lee’s shares can’t maintain their current value.

Paul Ausick