Food for Thought: Making Money in Spin-Offs

Posted: Jan 21, 2012 12:01 AM

Sara Lee Corp. (SLE, $19.40) is planning to split into two publicly traded companies during the first half of 2012 and also pay a special dividend of $3.00 per share prior to the stock spin-off.  Don't get too excited about that $3.00, though, because share prices are adjusted downward when dividends are paid.  The question here is: will one or both of the post-spin-off companies be fiscally healthy and competitive enough for the stock price(s) to subsequently rise?

The two post-spin-off stocks will represent Sara Lee's international coffee and tea business in one company, and North American operations in another company, which includes Jimmy Dean, Ball Park and Hillshire Farm meat products; baked goods, and the commercial food operations.

 Big changes have been happening at Sara Lee.  The Chairman and CEO suffered a health crisis in 2010 which forced her to step down from company leadership, and several new executives have taken on those and other leadership roles.  Sara Lee has current plans to divest various North American and European coffee, bakery, and refrigerated dough businesses in 2012, and the company has recently divested the bulk of its Household & Body Care business. Standard & Poor's Research has a Qualitative Risk Assessment of "Medium" on Sara Lee.  "Our risk assessment for Sara Lee reflects the relatively stable nature of the company's end markets, what we expect to be sizable cash flow from operating activities, and corporate governance practices that we view as favorable relative to peers, offset by prospective commodity cost pressure and changes related to a prospective special dividend and split-up of the company."

The company repurchased $1.8 billion of outstanding shares in fiscal years 2010 and 2011.  S&P estimates that Sara Lee's debt-to-capitalization ratio was 44% in 2011.  The company is in its 2012 fiscal year, which ends in June.
The stock has a current yield of 2.37%.  Sara Lee (SLE) has a curious chart, and other than a big drop & recovery with the 2008 Financial Meltdown, the stock has spent the bulk of the last ten years trading roughly between $13 - $21, repeatedly rising and falling.  That would correlate with its erratic net income performance during that time frame.
Wall Street has earnings per share (EPS) growth projections of 17%, 13% and 14% in fiscal years 2012 through 2014, continuing an upward trend since 2009.  Obviously, those numbers will change post-spin-off as new projections are made for the two separate companies.
The stock will likely trade $18.50 - $19.75 near-term, barring significant stock market disruptions.
I see Sara Lee as a spin-off/growth play.  I would wait and see if I could buy the stock around $18.40, hold it to receive the dividend and spin-off shares mid-year, then assess whether either of the two companies is worth holding longer-term.  Since the stock has a low PE vs. its peers (13) and growing earnings per share, I'm not worried that my investment will collapse in price.  But with new management in place, and lots of corporate fine-tuning having already taken place, I think there's an opportunity here to make money on a stock that nobody's talking about. 
Crista Huff, Goodfellow, LLC