Tue, 3 Jul 2012
The breakup of Sara Lee and the pending split-up of Kraft could unlock value for investors, says Morningstar's Erin Lash.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
As we celebrate Independence Day, a lot of corporate boards are looking at creating some independent companies out of their larger organizations.
We've heard spin-off plans from the likes of News Corp. and Abbott Labs, but also in the consumer packaged goods space, with Kraft and the former Sara Lee companies.
I'm here today with senior analyst Erin Lash to take a look at some of these consumer packaged goods spin-offs to see if they make sense for investors.
Erin, thanks for joining me today.
Erin Lash: Thank you for having me.
Glaser: So, let's start with the motivation of creating these spin-offs and creating these separate companies. Why did these corporations decide to get rid of that scale to become a little bit smaller?
Lash: Obviously, there is the benefit, or companies believe that there is the benefit, of increased focus--both from a management perspective, as well as from investing behind their brands, and so scale isn't always a winning aspect of a business, and bigger isn't always better.
Glaser: So, let's take a look at Sara Lee first. That spin-off has happened. Hillshire Brands is now the meat business that's trading in the United States, and also their coffee business that's trading in Europe. What did you think about the split? Does it make sense? Are there any good investable opportunities?
Lash: With Sara Lee's business, we thought that the spin-off made sense from the perspective that between international beverages, coffee and tea, and North American meats, there weren't a significant amount of synergies that existed between those two businesses. So splitting them up made sense from that perspective.
However, from our perspective, we think that there could have been, and there still may be, more value created as we think that both of these businesses are potential acquisition targets from some of their larger peers.
Glaser: So, in terms of valuation, do you think they are trading at a discount, where it's worth picking them up and waiting for that acquisition? Or is that too risky of a strategy?
Lash: We don't cover D.E Master Blenders, the international beverage business of the former Sara Lee company, but we have initiated coverage of Hillshire Brands, and right now it is trading at a slight premium to our fair value. Our fair value estimate is $26 per share, and it's currently trading just under $30 per share.
Glaser: Let's take a look at Kraft, then. This is a deal that hasn't come through yet, but in a lot of ways, it's a split-up of the post-Cadbury acquisition; it's kind of rolling that back a little bit.
Why do you think Kraft changed their mind that it made sense to have that candy and confectioner business in the traditional grocery business?
Lash: We think that Kraft's motivation stemmed more from the fact that they didn't think they were getting the appropriate valuation, or they weren't being credited with the value that the global snacks business should derive. We think that valuation was being held down by the slower-growing, more mature North American grocery business, and as a result, Kraft decided to split those two businesses.
From our perspective there is value being created by the separation of those two businesses, and both of those independent segments will still maintain significant scale even when they are split apart.
Glaser: Do you have a sense of which one will be more valuable, which one you'll be more interested in, in terms of owning the business for the long term?
Lash: From our perspective, it depends on the type of investor that's considering these businesses. We think that investors who are looking for more growth in the packaged foods space maybe will find more interest in the global snacks business. That business will have a significant presence in emerging and developing markets, and we think that there will be further opportunities for that business to extend the distribution of its existing brands through those faster-growing channels.
Conversely, we think that investors who are looking for more income might find interest in the North American grocery business. That business has placed a priority for its cash on dividend payments, and as a result, we think that could be an attractive business for income-seeking investors.
Glaser: Erin, certainly there is a lot of those out there today. Thanks for your thoughts on these spin-offs. I appreciate you speaking with me.
Lash: Thank you for having me.
Glaser: For Morningstar, I'm Jeremy Glaser.