This week Sara Lee announced that it was selling its bread business to Mexico-based baking giant Grupo Bimbo, for $959 million.
The sale is an embarrassment for Sara Lee. According to the Financial Times, Sara Lee acquired the baking unit in 2001 when it bought Earthgrains Corporation for $2.8 billion, making this a fine example of the buy high and sell low approach.
This is not a good way to build company value. Not surprisingly, Sara Lee’s stock has performed poorly for a very long time. Ten years ago you could buy a share for about $20. Today you can buy a share for about $15.
So what went wrong?
I suspect the problem was simple: optimism. Back in 2001 I’m certain Sara Lee executives thought they could turn Earthgrains bread into a profitable, growing business. As a result, they paid a generous price to acquire it.
The reality of the situation soon became clear: bread is fundamentally a very difficult business. It is capital-intensive and very dependent on operational excellence, getting the right amount of bread to the right stores at just the right moment. Profits are slim; apparently the Sara Lee unit recently had an operating margin of just 1.4%.
Faced with a difficult, low-margin and slow-growth business Sara Lee elected to give up and sell it off.
Of course, the Sara Lee team should have taken a hard look at the bread business before paying a generous price to buy it.
After this transaction closes, Sara Lee will be down to meats and coffee; the company will use the proceeds of the bread sale to buy back stock. Unfortunately, meats and coffee are tough businesses, too. A couple more sales and Sara Lee will simply vanish.
Sara Lee’s bread experience is an important lesson for anyone considering an acquisition. Never assume you can dramatically improve a business; the fundamentals may well be the fundamentals. Optimism can cost you a lot of money.
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