Disappointing. That's the only word I can use to describe Motley Fool Income Investor pick Sara Lee (NYSE:SLE) and its decision to jettison its European branded-apparel operations, which includes such well-known names as Wonderbra and Playtex. Wall Street isn't excited about the move, either. The company's stock value has remained roughly the same since the announcement.
The company announced on Monday that it is cutting loose these products, which registered nearly $1.2 billion in sales last year, for 100 million euro in cash and the assumption of 70 million euro in pension and related liabilities. There may also be future performance-based payments, but the size and timing of these payments were not identified.
The real bombshell in the announcement is that after this transaction closes, Sara Lee will "probably" have to fund euro $62 million in U.K. pension liability and that, ultimately, Sara Lee will recognize a "material settlement loss." If investors hate anything, it's uncertainty, and the U.K. pension announcement has plenty of it, including whether anything will happen and what it will cost if it does.
Sara Lee's current market capitalization is 74% of sales. According to the terms of the press release, Sara Lee is selling its European branded-apparel operations for roughly $200 million in U.S. funds -- a significant discount relative to its valuation based upon the enterprise price-to-sales ratio. So at first glance, I'm inclined to think that Sara Lee was pretty eager to get out.
The company line for today's sale to private investment firm Sun Capital Partners is that it's "another key step" in the company's transformation to a simplified and more focused Sara Lee. In April, I saw this restructuring as full of uncertainty and without a clear financial conclusion. It has been, and it will probably continue to be. If any of the assets it wanted to sell were hot properties, the sale certainly would have been concluded by now.
While Sara Lee has grown earnings by an anemic 2.8% over the past five years, analysts are looking for only 7.8% growth in the coming five years. But, at 15 times 2007 earnings (the fiscal year ends in June), that's not cheap.
Yes, there is a 4.4% dividend to cushion any significant downdraft in the stock, although that dividend has not stopped the stock from losing a quarter of its value over its year-ago levels. Investors looking for less uncertainty but wanting a company with a sound food operation should check out Income Investor recommendations Kraft Foods (NYSE:KFT), H.J. Heinz (NYSE:HNZ), and Unilever (NYSE:UL).
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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.
