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A leaner, meaner Sara Lee?
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August 17, 2000: 1:14 p.m. ET
Food and apparel firm is slimming down, hoping investors will bulk up its stock
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Sara Lee Corp. began trimming the fat from its weighty portfolio this week, hoping that over time a leaner, more defined appearance might lure back investors who seemingly lost interest in the $20 billion food and clothing conglomerate long ago. But apparently, not everyone loves Sara Lee.
In what recently has become an all-too-common story for the company that makes everything from Jimmy Dean sausage to Hanes underwear, investors largely shrugged off Wednesday's unexpectedly rich sale of Sara Lee's PYA/Monarch unit, keeping the company's long-term prospects on Wall Street shrouded in uncertainty.
"We're obviously undervalued, but I'm sure most of my peers would say the same," C. Steven McMillan, Sara Lee's chief executive officer, told CNNfn.com in an exclusive interview. "I think the final test [for us] will be performance. I'm very comfortable that this reshaping will continue to enhance our growth rates."
Three months ago, McMillan laid out an ambitious divestiture strategy for the traditionally acquisitive company, hoping that a tight focus on consumer packaged goods might stabilize the company's stock price.
But analysts interviewed this week say the strategy may prove more difficult than first expected.
A strategy for growth
Despite boasting strong fundamentals, including a free cash flow that is the envy of its peers, Sara Lee (SLE: Research, Estimates) is largely viewed as an unfocused, unwieldy company that investors have a hard time getting their arms around, analysts said.
"The company, taken in its entirety, is a very large, unfocused conglomerate and they've been trying to pare things down over the last few years," said Eric Katzman, an analyst with Merrill Lynch. "They are going to have to prove to the market that they are focusing on core brands that are going to grow."
Investors have vividly expressed their concern in Sara Lee's stock price this year. As of yesterday's close at 18-1/4, Sarah Lee's shares were down 15 percent year-to-date even as other food-related companies have gotten a substantial boost from the merger-related speculation enveloping the industry.
 The stock has not budged since McMillan unveiled his massive internal reorganization in May, although just prior to that point, Sara Lee shares hit lows they had not seen since 1995.
Still, most analysts take heart in the strategy McMillan, then the company's president, crafted just two months before he assumed the reins as CEO.
"What investors want is to get some clarity on what they are going to do with all the cash" generated from the reorganization, said Andrew Lazar, an analyst with Lehman Brothers. "Investors want solid visibility into top-line growth and this is not a company that has had all cylinders firing at the same time."
PYA/Monarch sale reaps unexpected gains
McMillan's strategy aims to concentrate Sara Lee's operations on three core areas: food and beverages, intimates and underwear, and household products.
In addition to the PYA/Monarch sale, Sara Lee intends to sell its Champion brand clothing line and the International Fabrics operation it acquired in its purchase of British fiber maker Courtaulds.
The company also plans to spin off its Coach leather operation later this year in an IPO some analysts predict could be worth up to $1.5 billion. PYA/Monarch, the No. 4 U.S. food service company, was likewise slated for an IPO, but McMillan said he privately believed it would attract a buyer as soon as Sara Lee disclosed its intentions to divest of the unit.
"I was not surprised by the high level of interest," McMillan said. "In fact, I expected it. The decision really rested on whether we would get a higher value from an acquisition or a higher value from an IPO."
 PYA/Monarch's sale was necessitated by a number of factors. The dominant food distributor throughout the Southeast, the company faced few options for expansion after Dutch supermarket chain Royal Ahold purchased U.S. Foodservice, the Northeast's dominant food service company, earlier this year.
"We either had to exit the business or become a much larger player," McMillan said. "When Ahold bought U.S. Foodservice, it took away one of the strategic acquisitions. When they did that, we figured this was one of the businesses that we would be better out of."
Thanks to several other acquisitions through the years, Sara Lee also found PYA/Monarch competing against its own customers at times, leading to the plans to divest the unit.
A PYA/Monarch IPO would have generated up to $1.2 billion after-tax cash for Sara Lee, Bear Stearns analyst Terry Bivens estimated, comparable to the outright sale. The advantage to selling it, he noted, is that the company gets the cash for the unit quicker, meaning it can be reinvested sooner.
Indeed, in the end, the situation worked out about as well as it could for Sara Lee. In addition to generating a higher sale price than analysts expected, the company secured a long-term supply agreement with PYA/Monarch's buyer, Royal Ahold, that provides a continued large source of business for Sara Lee's U.S. food manufacturing operations.
"It's basically a transaction between two old friends," McMillan said, noting Royal Ahold currently is PYA/Monarch's fourth-largest customer.
"What they need to do is deploy the cash in a way that drives some growth," Bivens said. "Sara Lee, rightly or wrongly, is not viewed as a growth company."
The challenge now: Spending the cash
Therein lies the challenge for McMillan, a 24-year Sara Lee veteran who worked his way up through the company's packaged meat, bakery and food service divisions before replacing longtime CEO John Bryan in July.
Despite posting record earnings during fiscal 2000, the company's revenue grew only 2 percent, hurt by slower food and hosiery sales.
The four divestitures originally were expected to generate $2.5 billion in new cash for Sara Lee. With the higher-than-anticipated price tag for PYA/Monarch, that number now is expected to exceed $3 billion, giving McMillan a lot of options.
McMillan said in addition to paying down debt, Sara Lee will use the money to buy back shares and make acquisitions in its core categories, although he said, "I think we will be very disciplined in doing that and not rush out just because we have cash in our hands."
But will it be enough for investors? Even after the divestitures, Sara Lee still will own and operate more than 150 brand names, few of which boast the clout of a recognizable market leader.
"I think they are making substantial changes, but the strategy is not risk free," Katzman said. "One of the central problems with Sara Lee's valuation is this is a company where a number of their brands are relatively small in the scheme of things. Investors are concerned that small brands are more vulnerable over time."
"Long-term, that's a tough fix. Wal-Mart is always going to need to sell Coke. They are always going to need to sell Wrigley's. Will they always need to sell Sara Lee's coffee or tea? I don't know." 
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Sara Lee Corp.
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