Why Do PE Firms Want Sara Lee?

Sara Lee appears to want to remain independent, but the company is a perfect PE play and could succumb to a buyout.

Earlier this week, various media reports said that KKR and Apollo had made bids to buy all of Sara Lee and were rejected. It seems obvious that Sara Lee, which has a $9.52 billion market cap, is in play.

So why do buyout shops want Sara Lee? It’s the brands, say banking and buyout execs. Sara Lee has a treasure trove of products—including its Jimmy Dean sausages and Ball Park franks—that are known and loved by consumers. This makes sense to me, since I’ll always buy Sara Lee’s cheesecake no matter who owns it.

There is also the PE strategy of cutting money-losing divisions/people to increase profits. Sara Lee is already trying to divest its bakery business. The company seems to be always selling something and could easily auction off other units. In July, the firm completed the sale of its air care business to Procter & Gamble Co. for $470 million.

“There are also a lot of inefficiencies and costs which could be removed to make the business stronger,” says one banker. “It is a typical private equity play.”

The same banker added that they wouldn’t be surprised if Blackstone made an offer for Sara Lee and rolled the company into its Pinnacle Food platform.

The Financial Times’s Lex, earlier this week, analyzed the Sara Lee situation. CEO Brenda Barnes stepped down in August following a stroke, so the company is without the architect of its restructuring. Sara Lee was a buyout candidate in 2006 and four years of almost constant reorganization have failed to improve the stock, Lex said. A sale of the bakery unit should cause operating margins to jump to 12% from 8%, says Lex, but the stock still doesn’t seem buoyed by a possible deal.

A sale of Sara Lee is definitely possible. PE firms are dealing with a $425 billion overhang and need to do deals. There has also been a lot of talk about a $10 billion LBO possible now that the debt markets have recovered somewhat.

With its large market cap, a sale of Sara Lee would likely come to at least $12 billion. This means that PE firms would probably have to group together to buy it. Even with the improved debt markets, PE firms could still be outbid by a strategic. Many strategics are cash rich, don’t need to rely on the debt markets, and could trump a PE offer. Unilever, which had $2.87 billion cash on its balance sheet at the end of 2009, has been mentioned as possible buyer.

Sara Lee’s board has so far rejected PE bids. This doesn’t mean they won’t bite at a higher offer. Cheesecake, anyone?