Fitch Ratings has affirmed the ratings of Sara Lee Corporation (Sara Lee; NYSE: SLE) and its subsidiary (see full list below) following Sara Lee''s announcement that it has received a binding offer from Unilever to acquire a portion of its International Household and Body Care (HBC) segment, consisting of global body care and European detergents, for EUR1.275 billion (approximately USD1.9 billion). Total debt was $2.8 billion at June 27, 2009. The Rating Outlook is revised to Stable from Positive.
Sara Lee''s total HBC segment generated $2 billion, or 16%, of Sara Lee''s revenues, and approximately $295 million, or 19%, of segment EBITDA in fiscal 2009. The portion of HBC being sold to Unilever generated $1 billion in sales and approximately $162 million, or 55% of HBC''s 2009 segment EBITDA. This represents an EBITDA multiple of approximately 11 times (x). Sara Lee is still exploring options for the remainder of its HBC portfolio, which consists of air care, shoe care, insecticides and non-European cleaning brands.
At the same time, Sara Lee has announced that its Board of Directors has authorized a $1 billion share repurchase program. The company also has approximately $150 million remaining on its previous authorization. Divestiture proceeds will be utilized for share repurchases and to invest in the remaining core businesses, potentially through acquisitions. In the absence of a large acquisition or incremental share repurchases beyond the currently announced levels, the company''s large balance of cash and cash equivalents, which was $959 million at June 27, 2009, is likely to grow. However, the vast majority of Sara Lee''s cash is located overseas and would require significant tax payments to repatriate it to the U.S.
The Outlook revision to Stable reflects that free cash flow (FCF)(cash flow from operations less capital expenditures and dividends) is likely to be negative in the near-to-intermediate term due to several factors, including the divestiture of at least a portion of the HBC business. Operating margins of the HBC segment were the second highest at Sara Lee, after International Beverages, and well above the company average. Heightened capital expenditures and cash restructuring costs will also contribute to negative FCF for at least the next year. After this transition period, the company''s ability to generate substantial FCF could be positive for the ratings.
Sara Lee''s credit ratings are supported by the diversification of the company''s remaining product portfolio, primarily consisting of coffee, meats and bakery, as well as significant operating earnings improvement in its North American businesses. The ratings are also supported by the company''s substantial liquidity, which is important as it goes through this period where its capital structure is in transition as divestitures occur. The company''s liquidity is supplemented by its high cash balances and its undrawn $1.85 billion committed revolving credit facility due in November 2011. This facility contains a financial covenant that Sara Lee must maintain an interest coverage ratio (consolidated EBIT to consolidated net interest) of at least 2.0 to 1.0. For the year ended June 27, 2009, this ratio was 8.4 to 1.0. Notes payable, including commercial paper, were $20 million at June 27, 2009. Upcoming debt maturities are minimal, with $55 million due in 2010 and $425 million due in 2011, primarily consisting of the Sara Lee/De Antilles N.V. EUR285 million term loan due in January 2011. Looking further out, Sara Lee has $1.1 billion 6.25% notes due in September 2011 (fiscal 2012).
For the latest 12 months ended June 27, 2009, Sara Lee''s total debt-to-operating EBITDA was 1.9 times (x), Funds from Operations adjusted leverage was 3.2x and operating EBITDA-to-gross interest expense was 8.5x. Leverage remains modest due to recent debt reduction and curtailment of share repurchase. Pro forma for the potential divestiture of the entire HBC unit, debt-to-operating EBITDA would be approximately 2.3x.
Sara Lee''s reported net sales fell 2.5% to $12.9 billion in fiscal 2009 (ended June 27, 2009), versus the prior year. Excluding a 4.6%, or $585 million, negative impact from foreign exchange and negative 0.6%, or $85 million, from net divestitures, net sales increased 2.7%. Higher pricing and enhanced sales mix contributed 5.2%, and volume declined 2.5%. Gross margin fell 120 basis points to 37.1% due to lower margins in North American Fresh Bakery, International Beverage and HBC. Operating income (excluding tobacco sales proceeds and impairment/exit charges) fell 2.7% to $1 billion. Adjusted operating segment income rose substantially in North American Retail, Fresh Bakery and Foodservice. However, International Bakery, International Beverage and Household & Body Care all declined primarily due to economic weakness in key European markets and the negative impact from foreign currencies. The company''s highest-margin businesses, International Beverages, HBC and North American Retail, generate the majority of the company''s operating earnings. Cash flow from operations was $900 million, up strongly from $606 million in the prior year, primarily due to improved working capital, partially offset by higher pension contributions. FCF was positive $241 million, which was a significant improvement from previous years when cash flow was reduced by cash taxes on repatriation and cash restructuring charges.
Fitch has affirmed the following ratings:
--Long-term Issuer Default Rating (IDR) at ''BBB'';
--Senior unsecured notes at ''BBB'';
--Bank credit facility at ''BBB''.
--Short-term IDR at ''F2'';
--Commercial paper at ''F2''.
Sara Lee/De Antilles N.V., (a wholly owned subsidiary):
--Long-term IDR at ''BBB'';
--Term loan credit facility at ''BBB''.
Fitch''s rating definitions and the terms of use of such ratings are available on the agency''s public site, ''www.fitchratings.com''. Published ratings, criteria and methodologies are available from this site, at all times. Fitch''s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ''Code of Conduct'' section of this site.
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Fitch Ratings, Chicago
Judi M. Rossetti, CPA/CFA, 312-368-2077
Wesley
E. Moultrie II, CPA, 312-368-3186
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
