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De-consolidated foods

4 June 2012 By Quentin Webb

Sara Lee’s coffee spin-off must create its own buzz. Investors need to believe the unit, officially known as “D.E Master Blenders 1753”, will benefit from a sharper focus and strong leadership.

This unusual cross-border divorce is the last big step in dismantling Sara Lee, the U.S. group once simply called Consolidated Foods. Thomson Reuters Starmine data show large European food and drink companies trade at roughly 15 times current-year earnings, or enterprise values of about nine times EBITDA. Averaging those multiples suggests an equity value of roughly 4.2 billion euros for D.E, based on Kempen forecasts.

Half or more of Sara Lee’s shareholders are U.S. index trackers, private investors and others who cannot or will not keep the D.E stock doled out in late June. Some may already be selling out of Sara Lee. So new owners must come forward.

At first glance, the story is no better than lukewarm. The biggest slice of sales, 43 percent, comes from retail customers in wobbly Western Europe. Weak margins spoil a big presence in Brazil. And 49 percent of overall revenues come from roast and ground coffee. It will disappoint amateur baristas to hear this is lower margin, and slower growth, than instant coffee or “single-serve” pods – such as those in Nestle’s hugely successful Nespresso machines or D.E’s own Senseo system, for longer drinks.

It doesn’t help either that European stock markets are wilting, and initial public offerings elsewhere have foundered. Still, new investors are intrigued and, barring a market collapse, Sara Lee seems determined to push ahead. Spin-offs are usually more resilient to market sentiment than flotations anyhow.

Moreover, cast-offs can thrive. Many investors rate Chairman Jan Bennink, who revitalised baby food, another sleepy sector, at Numico before selling to Danone for big money. And as a Heineken alumnus, Chief Executive Michiel Herkemij can draw on brewing industry knowhow about refreshing brands and driving them upmarket.

The duo plan to lift EBIT margins, currently 12.2 percent, by as much as 500 basis points within five years and halve working capital. Deals, to acquire emerging markets heft or perhaps a famous espresso marque, could help. If D.E can attack new and existing markets vigorously, the case for splitting conglomerates into focused successors will get a caffeine boost.


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