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Sara Lee Disarray Costs Shareholders About $1 Billion: Real M&A

Sara Lee Corp.’s managers, who failed to boost the stock price buying and selling $12 billion in assets in the past decade, destroyed shareholder value by passing up three chances to sell the company in the last year.

The board of the 72-year-old maker of Ball Park hot dogs and Hillshire Farm lunch meat, led by then-Chairman James Crown, rejected approaches from JBS SA, KKR & Co. and an Apollo Global Management LLC group that valued Sara Lee at as much as $18.50 a share, based on accounts from people with knowledge of the negotiations who declined to be identified because the discussions were private. The board asked for higher offers only to turn them down later, the people said.

While Sara Lee pushed for a sale at about $20 a share, according to two people, it decided to break itself up after JBS, the world’s largest meat producer, and the Apollo group dropped out without boosting their informal offers. After spending $3 billion for businesses from coffee roasters to fabric suppliers since 2000, and selling off more than $9 billion of units such as Hanesbrands Inc., its stock is still worth almost $2 less than at the start of the last decade.

“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,” said Tim Ramey, a former Sara Lee vice president of strategy and corporate development who left the company in 2002 and called the recent saga “sad.” He is now an analyst with D.A. Davidson & Co. in Lake Oswego, Oregon.

Relative Value

Representatives for JBS of Sao Paulo and New York-based Apollo and KKR declined to comment. Sara Lee’s Mike Cummins said splitting up was the best option for shareholders.

“After careful consideration of multiple options, the board unanimously approved dividing Sara Lee into two, pure-play public companies because we believe this strategy is the best way to unlock shareholder value,” said Cummins, a spokesman for Downers Grove, Illinois-based Sara Lee. “This was a decision based on facts, not rumors or speculation, and is one both the board and senior management team stand behind 100 percent.”

The highest $18.50 per share informal offer that Sara Lee passed up would have boosted its market value of $10.9 billion, as of last week, by $946 million, according to data compiled by Bloomberg. The company’s market value had dropped by almost $9 billion from $19.6 billion at the start of 2000, the data show.

Sara Lee fell 10 cents to $16.92 at 9:41 a.m. in New York Stock Exchange trading. The stock was valued at $18.79 on Dec. 31, 1999. Since then, Sara Lee has made at least 10 acquisitions and disposed of more than 30 businesses, according to data compiled by Bloomberg.

Rate of Return

Few have paid off. In 2005, when Sara Lee announced three takeovers and seven asset sales in its busiest year of deal- making, the company lost 22 percent of its value, the data show. After raising $2.4 billion from its spinoff of Hanesbrands, Sara Lee has underperformed the Winston-Salem, North Carolina-based underwear maker since it started trading in August 2006.

While Sara Lee had climbed 15 percent in the past three months before today as takeover speculation increased, the food company’s 9.4 percent drop since the start of 2000 contrasts with the 45 percent gain for consumer staples stocks in the Standard & Poor’s 500 Index. Only four other companies in the industry fell more than Sara Lee, data compiled by Bloomberg show.

Even with dividend payments, the company’s competitors returned more than twice as much to shareholders on average.

‘Shareholder Discontent’

“There’s no doubt there’s a lot of shareholder discontent out there,” said Roy Smith, a finance professor at the Stern School of Business at New York University and former general partner at New York-based Goldman Sachs Group Inc. A company often decides to break up when their managers have “tried a lot of things to get the stock price to go up and nothing they did seems to make any difference,” he said.

With its shares languishing below $15 last year, Sara Lee considered three unsolicited, informal approaches for the company, people familiar with the matter said. Management changes made it difficult for suitors to figure out whether Sara Lee wanted to sell, the people said.

Crown found himself juggling the takeover offers and a search for a chief executive officer after Brenda Barnes, who led Sara Lee for more than five years, resigned for health reasons in August. General counsel Brett Hart left in November, and Sara Lee also hired a new outside law firm, one person said.

Most recently, the company’s board told a group led by Apollo and former consumer executive C. Dean Metropoulos not to bother formalizing its proposal of $18.50, the people said. The group was asked to leave the food company’s so-called data room, where it was poring over Sara Lee’s books, they said.

Too Expensive

JBS gave up after determining it would be too expensive to obtain financing that would have enabled it to raise its informal offer of $17.50 in December, which Sara Lee rejected, said people familiar with the situation.

As JBS tried to raise more money, its bank, JPMorgan Chase & Co., talked with Apollo about joining its bidding group instead, according to two people. JPMorgan Vice Chairman James B. “Jimmy” Lee Jr. spoke with turnaround czar Metropoulos, whom Apollo planned to enlist to revamp Sara Lee, people said.

A JPMorgan spokeswoman declined to comment.

KKR, founded by Henry Kravis and George Roberts, discussed a bid of about $15 with Sara Lee in early 2010 and raised the price at the company’s insistence, the people said. Sara Lee told the buyout firm the higher amount wasn’t enough, they said.

KKR Rebuffed

Unable to land Sara Lee, KKR and Centerview Partners, along with Vestar Capital Partners, in November agreed to buy San Francisco-based Del Monte Foods Co. for $5.3 billion, including net debt.

KKR had planned to bring in James Kilts, the former CEO of Nabisco Inc. and Gillette Co., to lead Sara Lee. Kilts now runs a private equity fund tied to New York-based Centerview. After the talks with KKR, Sara Lee agreed to sell more of the company piecemeal, including the North American fresh bakery business.

Jeffrey Ubben, CEO of ValueAct Capital Management LP and one of Sara Lee’s directors, had pushed Barnes to dispose of more assets and encouraged other board members to consider a sale of the entire business, two people said. Some directors resisted his suggestions, they said.

Sara Lee took more than five months to find a new CEO after Barnes resigned, reflecting indecision among the board and executives about the food company’s direction, said the people.

Coffee and Meat

Sara Lee is now dismantling itself by separating the coffee and meat businesses, an option that it had been studying for months, according to people familiar with the matter. The company began in 1939 after Nathan Cummings, a Canadian-born entrepreneur, bought a sugar and coffee distributor in Baltimore called C.D. Kenny Co.

At its height, Sara Lee sold more than 100 brands in almost 200 countries. Coach Inc., the New York-based handbag business it split off more than a decade ago, has gained more than 2,000 percent since its initial public offering in October 2000 and is valued at $16 billion. During the same period, Sara Lee’s shares rose 2.2 percent.

“We actually liked Sara Lee as a conglomerate back when they wanted to spin everything off and unlock value,” said Nicholas Gerber, president of Ameristock Corp. in Alameda, California, who owned Sara Lee stock. “What they actually ended up doing was slowly dismembering a great American firm.”

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net; Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net

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