Sara Lee May Be Too Costly To Be a Buyout Target

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The New York Sun

Talk of a leveraged buyout continued to swirl around Sara Lee Corp. Wednesday, sending shares higher and bonds lower, but the markets may be getting ahead of themselves.

“For anyone who has done the analysis, it doesn’t make sense,” an analyst at Davidson & Co. in Lake Oswego, Oregon, Timothy Ramey, said. He said Sara Lee’s stock has gotten too rich to make a leveraged buyout work.

With Sara Lee shares recently changing hands up 33 cents, or 2.1%, at $16.40, the stock is currently trading at about 11 times Sara Lee’s earnings before interest taxes, depreciation and amortization, Mr. Ramey said. He explained private equity firms usually looking for companies trading at lower multiples, perhaps 7 or 8 times ebitda.

“Sara Lee is clearly a company that hasn’t been able to make its operational plan work. If it were priced lower, it would be vulnerable,” said Mr. Ramey.

A Sara Lee spokeswoman declined to comment on the rumors. But she reiterated management’s commitment to restructuring the company.

Sara Lee has long been considered a prime candidate for a breakup and last month Sara Lee completed the spinoff of Hanesbrands Inc. That deal marked the end of series of transactions that the company has made in order to better focus itself on its core products, which include its namesake breads and desserts, Jimmy Dean sausages, and Douwe Egberts coffee.

Despite the progress Sara Lee has made in its restructuring plan, the company is still facing a number of challenges that won’t go away any time soon.

Private-label competition and slow category growth rates are likely to continue to force Sara Lee to invest heavily to support its brands and drive future sales. Any buyer would need to consider these challenges.

Last month, Lehman Brothers analyst Andrew Lazar said the possibility of a leveraged buyout forms a floor for Sara Lee shares.

“We believe that the $14 per share level could prove somewhat of a floor for Sara Lee shares based on what we believe are very realistic, pragmatic LBO assumptions,” Mr. Lazar said, in the September 14 research note. Lazar wasn’t immediately available to comment.

In recent trading sessions, there has been increased demand for Sara Lee shares. By midday on Wednesday, Sara Lee had traded more than 5.5 million shares, compared with a typical average daily volume of about 4.8 million shares.

Mr. Ramey said he suspects Sara Lee’s own share repurchase plan may have boosted trading volume in the stock. Sara Lee plans to repurchase $500 million of its own stock during the fiscal year ending July 2007. The stock repurchase is part of a broader plan to repurchase $2 billion of its own shares.

Risk premiums on Sara Lee bonds continued to widen Wednesday on the LBO speculation. The company’s 6.25% notes due 2011 rose 43 basis points, or hundredths of a percentage point, to 158 basis points over Treasurys.


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