Sara Lee working to look its best before spin

By Martinne Geller

CHICAGO (Reuters) – Sara Lee Corp’s (SLE.N: Quote, Profile, Research) CEO Marcel Smits and other executives at the food and drink maker are looking at the upcoming break-up of the company as if both businesses were undergoing initial public offerings.

While Smits is busy structuring the split, meeting lawyers and shareholders, separating the accounts and drafting documents, the heads of the business units are looking closely at how to improve profitability and accelerate sales, especially since they will soon be running independently.

“People are starting to realize that in three quarters thereabouts, they’re going to be on stage, not as No. 3 on a meet-the-management presentation. No, (they) are the meet-the-management presentation, and that creates different perspectives,” Smits told Reuters in a boardroom overlooking the Morton Arboretum near Sara Lee’s corporate headquarters in a Chicago suburb.

Smits said managers viewed Sara Lee’s plan to spin off its North American meat business, home to Hillshire Farm lunch meat and Jimmy Dean sausages, from its international coffee business as a “once-in-a-lifetime opportunity”, just as an IPO.

“If you’re an IPO, you want to look good. You’ve got to meet and greet investors,” he said. “Anything that we need to do in order to look good in 12 months from now, let’s do it.”

That ranges from launching products such as kid-sized Jimmy D’s Breakfast Minis sandwiches to trying harder to preserve profits that can later be reinvested.

This is especially important with higher commodity costs, said Monty Pooley, president of Sara Lee’s North American retail business, which is being spun off.

“If in a commodity-escalating environment you don’t raise prices, then what you do is make it impossible to invest back into those businesses,” Pooley said. “Everything just stagnates.”

Pooley said he does not doubt that there will be “some adjustments” with the spinoff, but expressed confidence that the overall strategy will remain and hopes innovation and investment will increase.

“I’m very confident that the business model we’ve put in place is a fundamentally sound business model, and as we come out the other end as a more pure play (company), that we’ll take the benefits of that and exploit them,” Pooley said.

SUPPORT FROM SHAREHOLDERS

Smits, known for his financial savvy and role in selling Dutch retail group Vendex to private equity in 2004, became chief executive in January, the same day Sara Lee said it would split into two public companies after takeover bids could not entice it to sell the whole company. The split is expected in early 2012.

Smits had been chief financial officer, but took over as interim CEO in May after former CEO Brenda Barnes had a stroke.

Sara Lee shares soared as much as 47 percent to their highest level since 2005 between early October with news that private equity firm Apollo Global Management (APOLO.UL: Quote, Profile, Research) had approached Sara Lee, and late January, when Brazilian beef processor JBS SA (JBSS3.SA: Quote, Profile, Research) also made an offer.

The shares pared some of those gains after the split was announced, since it disappointed investors hoping to cash in on a sale. The stock has gained recently after being range-bound for weeks, as European coffee sales got a jolt from price increases and new higher-priced products.

Smits said he has been talking frequently with investors since the split was announced, essentially asking them to “hang in there” while Sara Lee goes through the process of the spin instead of a buyout. He said investor sentiment on the plan was more positive than he had expected.

“I’ve had shareholders say to me, ‘Please don’t sell to private equity because we are buying into the thesis that there is real upside’,” he said.

He said shareholders were also supportive of Jan Bennink, named executive chairman with responsibility for leading the spin. Bennink had been CEO of baby food maker Royal Numico, when Danone (DANO.PA: Quote, Profile, Research) acquired it in 2007 for $16.8 billion.

PASSING AN EXAM

Sara Lee expects to raise prices on its North American products by about 9 percent on average this year to offset spikes in commodities such as meat, wheat and coffee.

Despite the cost inflation, Smits is betting that Sara Lee’s performance this year will convince Wall Street of its strength in the future.

“It feels like passing an exam. If we do reasonably well this year, then we will do well in any year,” Smits said.

Analysts speculate that the drinks unit, with brands like Douwe Egberts coffee and Pickwick tea, will redomicile itself in Europe, where it generates much of its sales and profits.

Smits said a possible scenario for his own future could be that he runs the drink business, but said there were others. He has not said whether he plans to return to the Netherlands, where he designed and helped build a family home.

“It’s impossible to deliver proof of intent, but you can rationalize why I would have only one desire,” said Smits, who as of January 31 owned 67,702 shares of Sara Lee stock, worth $1.2 million at Thursday’s closing price of $17.80 per share.

“If the spin is successful, and we create two really good companies, then I’m going to be fine, whatever I’m going to be doing,” Smits said.

(Reporting by Martinne Geller)

Sara Lee working to look its best before spin