Sara Lee to be gobbled up?
A deal at $20 per share would be the largest leveraged buyout since the credit crisis.
By Jeff Reeves, editor of InvestorPlace.com
Sara Lee (SLE) is one of the most iconic names in the grocery aisles. 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 is its size. A deal at that price would be the largest leveraged buyout since before the financial crisis. But a Sara Lee purchase would also show all investors 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 have valued the company at up to $20 a share, or nearly 10% above the share price last week. That totals almost $13 billion.
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 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.
Post continues after video:
Another plus is that it shows the appetite for buyouts among companies with cash. There were plenty of big deals in 2010, including chip-maker Intel's (INTC) purchase of Web security firm McAfee for $7.7 billion, tech giant Hewlett-Packard's (HPQ) buying smart-phone maker Palm for $1.2 billion and United Airlines' acquiring competitor Continental for $3 billion.
But the proposed Sara Lee deal is worth more than all three of those high-profile transactions combined -- a sign that 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 $13 billion offer is a cool $130 million. That's to say nothing of the consultants and efficiency experts who would be brought in to Sara Lee after the company went 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.
- Related Article: Are You Paying Too Much in 401k Fees?
A lowball offer could spark a bidding war. SLEshareholders will see a 10% premium on current valuations if this offer goes through. But this offer could be only 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 spin-off of a very profitable meats unit that involves Ballpark hotdogs, Jimmy Dean sausage and Hillshire Farms lunch meats.
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 is a good sign that investors are not afraid to spend 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 necks out if they thought another downturn was likely.
There will surely be more news on Sara Lee in the weeks ahead. The consortium of private investors that includes 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.
- Related Article: 10 Best Stocks for 2011
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.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Like many companies this winter, the fast-food giant blamed a drop in same-store sales on the weather. But could its problems be bigger than a snowbank?
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.