Kraft (NYSE: KFT) and Cadbury (NYSE: CBY) got the consumer-staples sector humming with acquisition-related excitement earlier in the month. Now, U.K.-based Unilever (NYSE: UL) is bagging up the personal-care portfolio of Sara Lee (NYSE: SLE). Pending regulatory approval, the deal dramatically advances Sara Lee's restructuring goals, yet Unilever shareholders could be the first to benefit.
Shoe paste with your dessert?
For U.S. investors, the Sara Lee name is synonymous with tasty frozen pies and premade pound cake. But the company's international operations include such decidedly nonedibles as Kiwi shoe polish and cleaning product Endust. Management first decided to slim down operations in early 2005, and it's been busily shedding segments such as apparel and U.S. retail coffee ever since. Unloading the global body-care and European detergents businesses is one of its final steps to becoming a focused food-and-beverage outfit, a la Kraft or PepsiCo (NYSE: PEP).
The deal is priced at roughly $1.87 billion in cash, or 1.7 times segment sales. That rate's vastly higher than Sara Lee's stock valuation, but a modest discount to the shares of Procter & Gamble (NYSE: PG) and Bare Escentuals (Nasdaq: BARE), both of which offer personal-care products. Sara Lee CEO Brenda Barnes is reportedly "quite pleased" with the terms; she plans to use the proceeds to repurchase shares and invest in the core business. With total debt at a comfortable $2.82 billion against $373 million in annual free cash flow (after interest payments), those approaches appear to be sound uses of cash.
Post-deal, however, Sara Lee's financials could temporarily resemble that quart of buttermilk buried in the back of your fridge -- lumpy and sour. Ratings agency Fitch has downgraded its outlook for the company from "positive" to "stable," citing loss of revenue and restructuring costs, among other factors, all of which could drive free cash into the red.
Also, investors should note that Sara Lee's operating margin in the brands it will soon sell is the second-highest among the company's six business units, behind those of International Beverages. So far, the market is taking a shine to the deal, although I'd be cautious about assuming the best at this early point.
Bulking up
As for Unilever, the acquired brands will need to be integrated into existing operations. But unlike Sara Lee, the company will be adding revenue as it incurs costs. Also, compared to the U.S. company, Unilever's size dwarfs the deal's immediate impact.
That's not to say that the consumer-staples giant won't enjoy a boost from the acquired shower gel, hand-soap, and deodorant products. They complement Unilever's existing personal-care portfolio, which includes leading brands Dove and Axe, and add exposure to the middle of the price spectrum -- a standout positive, given the global recession. Geographically, management says the deal will bolster leadership positions in Western Europe and increase the company's already significant emerging-markets presence.
In Unilever's latest quarter, the company grew volume, but shrank margins. Only time will tell whether the soon-to-be-added brands reinforce that trend, or help reverse it.
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