Brazilian company JBS SA emerges as a potential bidder for Sara Lee

Sara Lee’s has become a business with a strong focus on food and beverages because of its large-scale divestment activities, including the sale of its personal care business to Unilever for US$1.9 billion, its air care business to Procter & Gamble for US$470 million, and most recently its shoe care business to SC Johnson for around US$316 million and its 51% stake in Indian household goods maker Godrej Sara Lee.

As a result, Sara Lee is a strong acquisition target for food and beverage conglomerates looking to build a stronger presence in the US market, such as Brazil’s JBS SA.

Financial implications of Sara Lee’s restructuring

Most recently, Sara Lee also sold its North American fresh bakery business, driven in part by poor economic conditions in the US. What is clear is that its position in the global FMCG market has changed. This restructuring has left proteins and coffee as Sara Lee’s core focus, with chilled processed food now accounting for the majority of its packaged food sales.

The major restructuring taking place at Sara Lee continued to affect the company’s financial performance in its 2011 fiscal year, although the impact of challenging market conditions in North America were equally as clear. Sara Lee posted a near 1% fall in net sales to US$2.6 billion for the first quarter of its 2011 fiscal year, ending 30 September 2010.

The company’s North American bias remains the key contributor to this weak performance, with low consumer confidence affecting sales in the region, in particular in the US.

JBS seeks international expansion of its packaged food operations

JBS is an animal protein processing company working in the areas of food, leather, products for pets, biodiesel, collagen, cans and cleaning products. The company is present on all continents, with production facilities and offices in Brazil, Argentina, Italy, Australia, the US, Uruguay, Paraguay, Mexico, China, Russia and other countries.

The company’s net revenue in 2009 reached R$55.2 billion (US$27.6 billion). Currently, its packaged food operations are largely limited to Brazil, and category-wise to canned/preserved food. However, it has intensified its investment in packaged food mergers and acquisitions. In 2009, its most important activities were the acquisition of American company Pilgrim’s Pride and the merger with local meat player Bertin.

Such an aggressive acquisition strategy strengthened JBS’s position in canned/preserved meat products as well as in canned/preserved ready meals.

Although Sara Lee’s core chilled processed food operations were badly hit by the recession, its strong labels, such as Hillshire Farm, Jimmy Dean and its eponymous Sara Lee, could still be strong assets for JBS as it aims to expand in these categories.

However, with the company’s strong reliance on the mature North American market – about 77% of its packaged food retail value sales are generated in this region – JBS’s exposure to a slow growing market would increase.

However, recent acquisition activities show successful emerging market players’ growing interest in expansion in large, affluent developed markets in order to achieve higher profit margins and a steady revenue stream.

Most recently, in November 2010, Mexico’s Grupo Bimbo bought Sara Lee’s North American bakery business for US$959 million to boost its sales beyond Mexico, while Chinese company Bright Food expressed an interest in acquiring United Biscuits’ largely developed market operations.

Sara Lee is attractive to JBS because it is a prominent global packaged food company offering an extensive and multi-tiered distribution and manufacturing infrastructure in the US and selected international markets, mainly Western Europe and Australasia.

In common with many of its US packaged food peers, Wal-Mart is a major customer and, hence, a major distribution channel. In addition, Sara Lee also supplies restaurants, healthcare facilities, schools and other institutional foodservice operators in Canada, Mexico and the US through its North American Foodservice business.

Despite the recent downsizing, Sara Lee has continued to invest in the expansion of its manufacturing infrastructure, including its processed food business. The company is investing over US$130 million in a new sliced meat production plant in Kansas City, which is due to open in its 2011 financial year.

In addition, Sara Lee bolstered its manufacturing base with the acquisition of Brazilian coffee company Café Damasco in November 2010 for nearly US$60 million.

Pros and cons of the integration of JBS and Sara Lee’s food operations

With the acquisition/integration of Sara Lee, JBS would become a top 30 global packaged food player (Sara Lee ranked 27th in 2009). However, despite the intense streamlining of its operations, Sara Lee still has a wide reach in packaged foods, with interests in categories such as ice cream, bakery and dairy products.

The integration of these non-adjacent categories with JBS’s predominantly meat processing business would raise structural and managerial challenges. The company’s financial capability to execute large-scale acquisitions has been demonstrated by its frequent acquisitive moves in recent years, for example the purchase of Swift Foods, which changed its name to JBS USA, and Pilgrim’s Pride.

The company’s continuous appetite to expand via large-scale acquisitions indicates the successful integration of its recently purchased new assets, although following the company’s recent investments a Sara Lee-sized acquisition would leave JBS with a high level of debt.

Going forward, with the integration of Sara Lee, JBS’s operations would be more diverse and extensive in various FMCG categories. However, it would also face the challenge of Sara Lee’s shrunken international food operations and the North American packaged food market struggling in a number of key categories.

At the same time, establishing a strong position in Sara Lee’s current principal geographic markets would offer JBS a wide and affluent consumer base, attractive operating margins and a steady revenue flow.