TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, December 21, 2010

Nobody Doesn't Like Sara Lee's Tax Opportunity

Sara Lee Wall Street Journal, Sara Lee's Businesses, Tax Bind Stir Takeover Interest:

In the past five years, Sara Lee Corp., once a hodgepodge of consumer brands, has narrowed its focus to food. But its businesses, which range from Douwe Egberts coffee to Hillshire Farm deli meats, still have little in common, one reason the company has become a tempting takeover target. ... In recent weeks, it has been considering a sale of the company to Brazilian meat processor JBS SA, say people familiar with the matter. ...

Analysts have speculated for months that the company was primed for a break-up or sale. In November, Sara Lee said it would sell its North American bread business to Mexican baker Grupo Bimbo SAB for about $1 billion. The remaining businesses in its portfolio function mostly independently, and appear to offer few sales synergies. They include its highly profitable international coffee and North American processed meats businesses, as well as its international bread and dough and food-service units.

With more than half of its profit coming from overseas—much of it from the coffee business—Sara Lee has to import cash to fund the restructuring of its North American businesses and pay its dividend. In doing so, it incurs a substantial tax burden, wrote wrote Sanford Bernstein analyst Alexia Howard, in a note to investors last week.

If the company were to stay together, executives would need to find a way to boost margins and cash flow in North America, perhaps by buying another coffee business, Ms. Howard said. Her conclusion: breaking up the company could greatly boost Sara Lee's stock price. ... "We increasingly view Sara Lee as a company whose current portfolio and geographic focus is inefficient from a tax perspective, so something has to give," Ms. Howard wrote.

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