Sara Lee Corp.’s talks to sell itself to Brazilian meat processor JBS SA have hit a snag over price, according to two people with direct knowledge of the situation.
Sara Lee, the maker of Jimmy Dean foods and Ball Park hotdogs, recently rejected a takeover offer from JBS, deeming the price too low, said the people, who declined to be identified because the talks are private. The bid was less than Sara Lee’s intraday high of $17.62 on Dec. 17, when the Wall Street Journal reported the companies were in talks, the people said. The stock closed at $17.26 that day, valuing Sara Lee at $11 billion.
The board of Sara Lee, which is considering other options for the Downers Grove, Illinois-based company, hasn’t given JBS a specific price at which it would sell, the people said. JBS, the world’s largest meat-processing company, has been in talks with Sara Lee about a deal for several months and many key details have been worked out, the people said.
Spokesmen for Sara Lee and JBS declined to comment.
Sara Lee rose 43 cents, or 2.5 percent, to $17.69 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have advanced 45 percent this year. JBS dropped 9 centavos to 6.91 reais in Sao Paulo and has slid 26 percent this year.
Sara Lee, whose sales surpassed $10 billion last year, has decided to sell other divisions, such as the North American bakery unit, to concentrate on its faster-growing coffee and meats businesses. The company has been led by interim Chief Executive Officer Marcel Smits since Brenda Barnes resigned four months ago to focus on her health.
“At this point, we see Sara Lee at a crossroads,” Alexia Howard, an analyst at Sanford C. Bernstein, said in a Dec. 14 note to clients. The sale of the bakery unit and other businesses “could pave the way for a broader breakup scenario or takeover over the coming year.”
No deal is imminent and it is unclear if a sale will be completed, said the people. JBS is being advised by JPMorgan Chase & Co. in the transaction. Bank of America Corp. is advising Sara Lee.
Sara Lee’s board is also analyzing whether it should spin off either its remaining meats or coffee divisions, a decision that would be driven by the tax implications of these transactions, said the people familiar with the matter. The board has moved slowly on naming a new CEO as it assesses its options, the people said. Sara Lee also attracted interest from buyout firms including Apollo Global Management LLC and KKR & Co. earlier this year, people with knowledge of the matter said in October. Those approaches were rejected, the people said.
Over the past five years, there have been 367 global deals in the meat industry, with a median multiple of 8.4 times earnings before interest, taxes, depreciation and amortization, or EBITDA, according to data compiled by Bloomberg. Eric Serotta, analyst at Wells Fargo Securities, said in a note to clients today that Sara Lee could sell for as much as 10.5 times EBITDA, or about $12.8 billion. The New York-based analyst rates the shares “market perform.”
A sale to JBS would likely result in a higher price than a purchase by private-equity firms, so Sara Lee is giving JBS time to see if it can raise the financing and is willing to risk its credit rating, according to the people. JBS’s market value is just below Sara Lee’s at about $10.5 billion.
JBS is trying to avoid taking on so much debt that it will slide further below investment grade, the people said. JBS has made about more than a dozen acquisitions since 2007, expanding into the U.S., Australia and Europe.
“The obstacles to a potential sale to JBS are not insurmountable,” Serotta said in a note to clients today. “While JBS has roughly the same market capitalization as SLE, JBS could potentially receive support in financing a transaction from the Brazilian government.”
Under Barnes, who took charge in 2005, Sara Lee divested divisions such as apparel that accounted for roughly half of its overall sales. With the sale of the bakery unit to Mexico’s Grupo Bimbo for $959 million, Sara Lee now generates more than half of its sales and profits outside the U.S., according to Howard, the Bernstein analyst.
“We increasingly view Sara Lee as a company whose current portfolio and geographic focus is inefficient from a tax perspective, so something has to give,” Howard said.
If Smits, 49, is chosen as CEO, a breakup or privatization is more likely, Howard said in her note. The other internal candidate for the job is C.J. Fraleigh, who runs North American retail and foodservice operations. Executive recruitment agency Egon Zehnder is working the Sara Lee’s board on the search.
JBS, led by CEO Joesley Mendonca Batista, has been expanding through takeovers after acquiring meat processor Swift & Co. in 2007 and two Smithfield Foods Inc. units in 2008. It also bought a majority stake in poultry producer Pilgrim’s Pride Corp. in 2009 to diversify from beef.
“You could make the case that JBS is not interested in Sara Lee’s beverage business but that could be a good diversification strategy for JBS,” analyst John Baumgartner of Telsey Advisory Group said in an interview today. “There could also be a joint bid where JBS gets the meat unit and a private equity player gets the beverages. There are a few ways to come at this.”
Batista has said the company will continue to grow as it seeks more acquisitions in the U.S. and Brazil, the world’s biggest beef producers, as well as other countries. “We’ve only just started,” Batista told reporters in Sao Paulo last year. The company generated $20 billion in revenue in 2009.