Sara Lee’s Bread Unit Sale Won’t Sizzle

Sara Lee’s proposed sale of its bread business will generate some interest from strategics and private equity firms, but don’t expect a hot bake-off.

Downers Grove, Ill.-based Sara Lee, which seems to be always selling something, has hired Bank of America to advise on options for its food and bakery unit for around $1 billion, according to Crain’s Chicago Business.

Pepperidge Farms, which is owned by Cambpell Soup Co., has showed interest in the unit, Crain’s says. Other potential bidders include Grupo Bimbo S.A. de C.V. and Flowers Foods Inc.

Canada’s George Weston, which owns Loblaw Co. Ltd. and Weston Foods, also could make a bid, one banker said. As for private equity names, there is Hostess Brands (fka Interstate Bakeries), which is 50% owned by Ripplewood Holdings.

The Sara Lee bread sale isn’t expected to be a sizzler. Interstate Bakeries, for example, struggled for years before striking a deal with Ripplewood when it came out of bankruptcy. “Although [the Sara Lee bread assets] are in better shape than Interstate was, it is still a challenging business model,” the banker said.

Sara Lee’s bread business produced $107 million in operating profits over the past three fiscal years, Crain’s said. Operating profit for the bread unit was $36 million for the first nine months of 2010, according to an SEC filing.

Earlier this month, Sara Lee completed the sale of its air care business to Proctor & Gamble Co. for $470 million.

Larry Nusbaum, Vertex Capital Management’s chief operating officer, says Sara Lee’s value is in its distribution network. “With $2.2 billion in sales, that’s a large operation,” says Nusbaum.

Vertex Capital owns several consumer products companies, including Ronco (think the infomercials with Ron Popeil pitching the Veg-O-Matic or the Showtime Rotisserie Oven). “Bakeries are very difficult,” Nusbaum says. “The machinery depreciates and the business is very labor intensive.”

Sara Lee owns Earthgrains Co., a breadmaker, which would make it attractive to a consumer products company. Nusbaum doesn’t believe the Sara Lee bread unit is a deeply distressed situation, but PE investors like Cerberus, the Blackstone Group and Comvest Group could be interested, he says.

Vertical heavy food businesses, including baked goods or disposables without unique patents, typically sell for 4 to 5 times EBITDA, Nusbaum says. By comparison, nutraceuticals (vitamins) can go for 6 to 8 times, while housewares are being sold for 5 to 6 times, he says. “The Sara Lee bread business is an overhead intensive business,” Nusbaum says.

Officials for Sara Lee and Hostess declined comment.