How Does HBI Spinoff Affect Sara Lee?

Does Sara Lee Really Benefit from Spinoff?

Sara Lee (SLE) recently issued full year results. Sales fell 1% to $15.9 billion and diluted earnings fell approximately 20% to $0.72 per share. The reasons for the shortfall? According to some analysts, stagnant business. Will the spinoff help? What it will do is leave Sara Lee as primarily a food company, marketing brands such as Hillshire Farm, Jimmy Dean, Ball Park franks, Kiwi Shoe Polish, and Sanex skin brands.

The New Sara Lee?

Management sees the "new Sara Lee" as a smaller and more tightly focused company. Sara Lee's stock has steadily declined over the past two years, from a high of $25 per share in January 2005 and now to below $17. Coupled with a dividend that has been slashed to 2.3%, is there anything for shareholders to look forward to? If HanesBrands (HBI) performs anything like Sara Lee's former successfully spinoff, Coach, they may. Sara Lee employees will receive one HBI share for every Sara Lee share they own.

HanesBrands Shells Out

In addition, Sara Lee will receive a $2.4 billion dividend, which HanesBrands will assume as debt. The idea is to generate income for shareholders, repurchase stock and reduce debt. All possible thanks to the cash-generating prowess of its food operations. But what about growth?

Stagnant Growth in the Food Industry

Sara Lee's debt rating was downgraded earlier this year, partly because the food industry is tough and sales are slowing. Pressure from competition (Kraft and Unilever), commodity price inflation and energy costs all to their part in squeezing profitability.

Where to From Here?

Sara Lee's stock price, at 5 year lows, definitely reflects its woes. But where do we go from here? Is SLE a bargain or will it continue to decline? Time will tell.

References: The Motley Fool, "Sweet and Sour at Sara Lee," Ryan Fuhrmann, August 16, 2006.

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• Shareholder Value - Will the spinoff of Hanesbrands bring value to Sara Lee stockholders or only to upper management?