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Opinions and views from expert CFOZone members.

Jan 28

Breaking up is easy to do

Posted by Stephen Taub in splitspin-offdividendsdivestituresDealsCFOCashCareers/ManagementCapitalactivist investors

Stephen Taub

Sara Lee is the latest company to break itself into two or more separate companies.

The split announcement comes in the same month that Motorola divided into two separate companies.

Also in January, ITT, the once-gilded conglomerate, said it would split into three separate companies while Marathon Oil said it would split the company in two.

Marathon, of course, was created from a spin-off from United States Steel in 2002.

Sara Lee Friday said its North American Retail and North American Foodservice businesses (excluding the North American beverage business) will be spun off, tax-free, into a new public company that will retain the "Sara Lee" name. Its brands include Sara Lee, Jimmy Dean, Ball Park, and Hillshire Farm. The new company would have reported about $4.1 billion in revenue in fiscal 2010.

The yet to be named other company will consist of Sara Lee's current International Beverage and Bakery businesses, as well as the North American beverage business. Its brands will include Douwe Egberts, Senseo, Pickwick, Maison du Café, L'OR, Café Pilão, Marcilla and Bimbo. This entity would have reported about $4.6 billion in revenue in fiscal 2010 using fiscal 2010 actual exchange rates.

The separation is expected to be completed in early calendar year 2012.

As part of the plan, the board of directors intends to declare a $3 per share special dividend, the majority of which will be funded with proceeds from the sale of the company's North American Fresh Bakery business. The special dividend is expected to be declared and paid in fiscal 2012 and before completion of the spin-off of the two companies.

In February 2010, Sara Lee announced plans to repurchase between $2.5 and $3 billion of stock. After payment of the $3 special dividend in fiscal 2012, the company will have returned a total of $3.5 billion of capital to its shareholders since the revised capital plan was announced.

The decisions to split-and Sara Lee's decision to institute a one-time $3 dividend-also marks the return of the activist investor.

One of Sara Lee's board members is Jeff Ubben, founder, chief executive officer and chief investment officer of ValueAct Capital. The hedge fund manager is known for taking strategic positions in companies and then working closely with management to create greater value.

He rarely if ever plays a hostile, confrontational role like many other activist hedge funds. Rather, he prefers to work behind the scenes and frequently joins the board of directors.

The company Friday also made a number of management changes, including the naming of Mark Garvey as chief financial officer. He has been serving as interim chief financial officer since May 2010.

Dow Jones notes that Sara Lee decided to split into two companies after rejected Brazilian beef processor JBS SA's $17.50-a-share offer for the company, claiming it was too low.

It was also reported that private equity firms were looking at the company.

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