In late June of 2012, famed prepared-foods company Sara Lee announced that it had finalized the spin-off of its global bakery and beverage businesses. The transaction split the decades-old company into two components: Chicago-based Hillshire Brands (HSH – NYSE) and Utrecht, Netherlands-based D.E. Master Blenders 1753 (DE – EURONEXT). Most of Sara Lee’s North American assets were subsumed into Hillshire Brands. Meanwhile, D.E. absorbed the company’s coffee and tea businesses as well as most of its internationally-marketed brands. In the aftermath of the spin-off, Hillshire Brands has enjoyed consistent stock-price performance.
About Sara Lee, Hillshire Brands and D.E. Master Blenders 1753
During its heyday, Sara Lee was regarded as one of the most popular American prepared-foods and baked-goods brands. Although it once owned some peripheral clothing properties, it is principally remembered for its namesake brand of frozen dinners and bakery products. In addition to its namesake, its key American brands included Hillshire Farms packaged meats, Ballpark hot dogs, and Jimmy Dean sausages and breakfast sandwiches. During the half-decade that led up to its breakup, Sara Lee divested from a number of shrinking or unprofitable businesses. Buyers for these divisions included Unilever (ULVR – LSE) and Grupo Bimbo (BIMBO – BMV).
Hillshire Brands boasts a streamlined portfolio of meat, cake, cheese and sandwich brands. In addition to Sara Lee’s three core meat-focused brands, the company also retained the namesake brand as well as the high-end Chef Pierre label. Its products can be found in supermarkets, big-box stores and warehouse clubs across North America. Hillshire also maintains a thriving wholesaling business that works with major North American food distributors. The company employs nearly 10,000 people and is expected to pull in over $4 billion in revenues in 2013.
D.E. Master Blenders 1753 focuses primarily on the global markets for baked goods as well as coffee, tea and other specialty beverages. The company sells coffee, tea, specialty beverages and baked goods to retailers, wholesalers and end users in over three dozen countries around the world. It also maintains a drink-dispensing division that sells cappuccino and tea machines to affluent private customers. Supermarkets and discount retailers account for the bulk of its sales. D.E. Master Blenders employs about 7,500 people and expects to earn nearly 3 billion euros in 2013.
How the Deal Was Structured
Under the terms of the deal, Sara Lee’s stock underwent a one-for-five reverse split. As of June 27, 2012, all Sara Lee shareholders saw their holdings transform into Hillshire Brands shares and shrink by a factor of five. In addition, each former Sara Lee shareholder received shares in D.E. Master Blenders on a one-to-one basis. The company paid out a concurrent $3 special cash dividend on all D.E. Master Blenders shares.
Since the spin-off, D.E. Master Blenders shares have traded in a narrow range between 8.60 euros and 10 euros per share. Relative to the shares’ pre-deal value of about 8.40 euros, the current closing price of 8.81 euros per share represents a premium of about 5 percent.
Hillshire’s Post-Deal Performance
Hillshire’s re-branded stock debuted on June 28, 2012 at $28 per share. After a brief spike to about $30 per share, the stock tumbled to a low near $24 in early August. Since then, it has remained on a steady uptrend and currently sits at $32.25. Shareholders who held Sara Lee’s (SLE – defunct) stock during the changeover enjoyed an instantaneous arbitrage premium of 10 percent.
From Sara Lee’s last closing price of $24.76 per share, Hillshire has appreciated by about 30.3 percent. Relative to Hillshire’s debut price of $28 per share, it has delivered a premium of 15.2 percent. During the same period, the S&P 500 has gained roughly 14 percent. In other words, the pre-deal premium has beaten the broader market’s performance by a factor of two.
Although the post-deal premium has essentially matched the broader market’s performance, it is notable that Hillshire’s stock briefly bounced off of Sara Lee’s pre-deal lows in early August of 2012. This enabled investors who missed the pre-deal arbitrage opportunity to pick up Hillshire at a significant discount and ride it for a substantial gain.
Long-Term Prospects and Future Growth Potential
At this point, it appears likely that D.E. Master Blenders will remain independent for several years to come. By contrast, Hillshire Brands has already sparked takeover speculation among market-watchers. In particular, Springdale, Arkansas-based Tyson Foods (TSN – NYSE) appears well-positioned to subsume the smaller company into its operations. As one of the world’s largest independent producers of chicken products, Tyson would find a natural complement in Hillshire’s pork-centric offerings.
However, Tyson is encumbered by a fair amount of debt. Any theoretical buyout would be complicated by the need for Tyson to find a source of leverage. Additionally, Hillshire’s share-price strength has rendered it less attractive as an immediate takeover prospect. In fact, prospective buyers would be imprudent to act before seeing multiple quarterly earnings reports. Given these constraints, a buyout announcement is unlikely to come before the latter half of 2013.
Investors who purchased Hillshire shares in the aftermath of its spin-off from Sara Lee have been handsomely rewarded. Although the performance of D.E. Master Blenders has been less noteworthy, the long-term survival of Sara Lee’s former European division appears to be assured. Depending upon the strength of these companies’ coming earnings reports, they may yet offer attractive buying opportunities at their current levels. Opportunistic investors would do well to make targeted purchases on any signs of share-price weakness.