Sara Lee (NYSE: SLE) is one of the most iconic names in the grocery aisles and one of the top stock picks among consumer staples companies. But if a group of prospective buyers has its way, the name will be taken off the shelves of Wall Street as the publicly traded stock goes private in a deal worth nearly $13 billion.
The move is worth noting for a few reasons, not the least of which being its size. A deal at that price tag would be the largest leveraged buyout since before the financial crisis. But a Sara Lee purchase would also show all investors that that mergers and takeovers are still very much in favor on Wall Street — a good sign for all stocks, and for the economy in general.
Sara Lee will have a few days to weigh an offer from a group of private equity firms that has valued the company at up to $20 a share, or nearly 10% above the share price last week. That tallies almost $13 billion. If successful, a deal that size would be among the largest leveraged buyouts since before the failure of Lehman Brothers in 2008 and the days when the credit markets dried up.
So why should you care about a deal this size? Here are three reasons the Sara Lee buyout is a good sign for everyone — even if you’re not a shareholder:
Good Sign for Lending: First and foremost, the best news about this deal for all investors is the mere price tag. A $13 billion offer is not chump change, so the fact that companies could secure financing of that scale is a good sign. Another plus is that it shows the appetite for buyouts among companies with cash. There were plenty of big deals in 2010 including chipmaker Intel (NASDAQ: INTC) purchasing web security firm McAfee for $7.7 billion, tech giant Hewlett-Packard (NYSE: HPQ) buying smartphone firm Palm for $1.2 billion and United Airlines (NYSE: UAL) acquiring competitor Continental for $3 billion But the proposed Sara Lee deal is worth more than all three of these high profile transactions combined — a sign things are only heating up in the acquisition and buyout arena and bigger companies are now in play for buyouts.
Buyouts are Big Business: Financial stocks make big money in fees on these buyouts regardless of how the company fares afterward. A 1% fee on this $19 billion offer is a cool $190 million. That’s to say nothing of the consultants and efficiency experts that will be brought in to Sara Lee after the firm goes public in an effort to cut the fat and maximize profits. Those contracts are good for economic growth and can create jobs and commissions for those involved with the buyout.
Lowball Offer Could Spark Bidding War: SLE shareholders will see a 10% premium on current valuations if this offer goes through. But this offer could only be the beginning, since analysts have said Sara Lee could fetch as much as $23 a share, or $14.7 billion, in a takeover. That’s in part because the company’s stock is approaching a new-52 week high and the premium would have to reflect a price above current valuations. It’s also because any buyer will almost certainly break up the packaged food powerhouse and sell of the parts – including the spinoff of a very profitable meats unit that involves Ballpark hotdogs, Jimmy Dean sausage and Hillshire Farms lunchmeats. In short, Sara Lee has a lot to offer and there could be a bidding war after this opening offer. That’s great for shareholders, and also a good sign that investors are not afraid to spend money big money to buy a company. Any investment of that size is a bullish sign for the economy, since big spenders wouldn’t stick their neck out if they thought a “double dip” or similar downturn was likely.
There will surely be more news on Sara Lee in the weeks ahead. The consortium of private investors that include Apollo, Bain Capital and TPG Capital will likely face a competing offer soon – according to an inside source, Brazilian beef processor JBS has already arranged a financing package to bid for the food giant.
But even if you’re not a shareholder of Sara Lee stock, you should be encouraged by this deal. It shows that companies are willing to spend — and sometimes spend big — on takeovers right now, all in anticipation of big profits down the road. That’s a bullish sign for the stock market and the economy in general.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter. As of this writing, he did not own a position in any of the stocks or named here.
