Food and beverage company Sara Lee (SLE) has renamed its American meats business Hillshire Brands in its run-up to split later this month, in order to create two separate, pure-play companies: the international beverage business, renamed D.E Master Blenders 1753 (to be merged with CoffeeCo), and the North American meats business.

The company's board has also approved a one-for-five reverse stock split of Sara Lee common stock to take effect immediately after the separation. Sara Lee stockholders will receive one ordinary share of the Dutch company D.E Master Blenders 1753 for each share of Sara Lee CoffeeCo common stock they hold, along with a $3 special dividend per share.

The company competes with major food and consumer companies like Kraft Foods (KFT) and Nestle (NESN).


Significant business restructuring ahead of split to focus on core brands

Sara Lee's North American businesses have suffered due to a slump in the food-service sector and high input costs over the past few quarters. The consumer food-service industry was hit hard during the recent recession as more consumers chose to eat at home rather than spend money to eat out. Sara Lee has been underperforming and trailing peers despite an envious portfolio of market leading meat brands like Jimmy Dean (breakfast sausage), Hillshire Farm (meat and sausages) and Ball Park (hot dogs). It has now shifted its focus to unlocking the profitability potential of its core meat brands.

Accordingly, Sara Lee divested its North American fresh bakery business to Group Bimbo, its tea and coffee businesses to J.M. Smucker and its refrigerated dough business to Ralcorp last year. It also acquired Aidells Sausage in May 2011, a San Francisco-based premium meats business, to expand its presence into the organic and natural meats segment and from increase its reach in retail channels.

Many of Sara Lee's non-core businesses have so far weighed on the company's profitability, particularly through inefficient supply-chain management. The split and sale of non-core businesses should help the company streamline its supply chain and rationalize operating expenses to improve returns.

We have a $22.69 Trefis price estimate for Sara Lee, which is at 5% premium to the current market price.

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