Sara Lee Debt

Can HanesBrands Survive Under Debt Load?

Sara Lee is planning on spinning off its U.S. apparel division, which will be owned by HanesBrands, Inc., with an estimated 60 percent debt load. HanesBrands will borrow $2.6 billion to capitalize the firm, $2.4 billion of which will be paid in a one-time dividend. Morningstar Inc. analyst Greggory Warren raises concerns about the long-term viability of the company, given this large debt load. Vlasic Foods International Inc., spun off by Campbell Soup Co., faced a similar debt load and as a result filed for bankruptcy in 1998. Sara Lee spokeswoman Julie Katey maintains that the debt load is "appropriate," and that HanesBrands will have "strong cash flows and fundamentals."

No IPO to Reduce Tax Bill

The purpose of this debt "spin off" is to reduce capital gains taxes it may have incurred in an IPO (Initial Public Offering). The IPO would have raised more cash, but purportedly not enough to counter the tax bill.

Sara Lee Cashes In

If all sales go as planned, Sara lee will have raised nearly a billion dollars over ($800 million) the original $3 billion projection. Sara Lee has not indicated using the cash for anything other than paying down its $5 billion in debt.

HanesBrands Trading on NYSE Next Month?

Credit Suisse analyst David Nelson estimates that the company will have a market value of $4 billion when it begins trading on the NYSE as early as next month.

References: Chicago Tribune, Sara Lee Spinoff to Start with Debt, July 21, 2006.

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