A Retrospective On An Iconic Brand

Mar.29.13 | About: Hillshire Brands (HSH)

"Everybody doesn't like something,

But nobody doesn't like Sara Lee."

It was an annoying little jingle that was almost impossible to forget. That jingle is inextricably linked to family memories and particularly unhealthy desserts. My favorite was the marble pound cake. There it was, beckoning from the frozen food section of the supermarket. And when we got home, we would start wondering when we would be rewarded by our Mom deciding it was time to defrost it.

And it wasn't just the pound cake and other frozen desserts. There is a long family history with Sara Lee. My late aunt purchased four shares of its predecessor, Consolidated Foods. She decided that it was her patriotic duty to rescue the stock market following the assassination of John F. Kennedy in late November 1963. It was her first purchase of shares of stock. Decades later when my aunt passed away, I, along with my brother and sisters, inherited a diverse portfolio of stocks, including Sara Lee.

The company made haphazard acquisitions and divestitures over the years, often splitting the stock and paying a nice dividend. The acquisitions included brands as diverse as Kiwi shoe polish and Electrolux, and divestitures eventually included Coach (NYSE:COH) and Hanesbrands (NYSE:HBI).

In 2000, Sara Lee had an IPO of just under 20% of Coach, and the following year, spun it off to Sara Lee shareholders. The growth in Coach has been spectacular, growing from a split adjusted price of just over $2 to nearly $50 (and also pays a dividend). The growth in Hanesbrands, while not spectacular, has been quite good. After spinning off from Sara Lee in September of 2006, it has grown from $21.11 to $45.56.

Sara Lee later started acquiring coffee brands Chock full o'Nuts, Hills Bros., and Chase & Sanborn. Then, in late June of last year, it completed a further break-up of the company:

After the market closed on June 28, 2012, Sara Lee Corporation (Sara Lee) shareholders of record received a share in D.E MASTER BLENDERS 1753 [DE] and a $3.00 per share dividend paid by DE US, Inc. The ratio of DE shares to Sara Lee shares was 1:1. In other words, for every one share of Sara Lee you held, you received one share of DE. DE holds Sara Lee's former international coffee and tea business. Then, prior to the start of trading on June 29, 2012, Sara Lee shares underwent a reverse split of 1:5, so for every five shares of Sara Lee you held on such date you then held one share of Sara Lee. If fractional shares resulted, you received a check for the value of those fractional shares. Finally, Sara Lee changed its name to The Hillshire Brands Company (Hillshire Brands) and all Sara Lee shareholders became shareholders of Hillshire Brands.

As an example, if you held 100 Sara Lee shares you received 100 DE shares and $300.00. Then your 100 Sara Lee shares became 20 Hillshire Brands shares.

Like some other retail investors, since it had been a stable position in my portfolio, I simply ignored what was going on. At least, until Thursday, March 28th. That's when D.E. Master Blenders (OTC:DEMBF) closed the week at $15.31, up $3.10. It turns out there was an announcement by the company (not widely disseminated since the company headquarters is in The Netherlands). From Bloomberg:

...the coffee and tea company spun off by Sara Lee Corp., said it's in talks to be acquired by a group led by Joh. A. Benckiser in a bid that values the company at 7.6 billion euros ($9.7 billion).

JAB, the investment firm run by Bart Becht, plans to pay 12.75 euros a share, Amsterdam-based Master Blenders said today, a 33 percent premium to yesterday's closing price. The proposal is subject to an examination of the company's finances and talks are "in an early stage," the maker of Douwe Egberts said.

So, how has this breakup served investors? On June 28, 2012, the shares closed at $18.50. Hillshire Brands (NYSE:HSH) closed this past week at $35.15 and, as noted above, DEMBF closed at $15.31. So, that $18.50 has become $7.03 of HSH (based on the 1:5 reverse split), $15.31 of DEMBF and the $3 dividend for a total of $25.34. In addition, DEMBF at 12.75 euros would rise another $1 per share (at 1.28 euros/dollar) if the deal is completed.

Sara Lee cakes are still around, but it isn't obvious from the Hillshire web site. The home page shows Hillshire Farms, Ball Park franks, Jimmy Dean sausages, Gallo Salame and State Fair corn dogs. It's not until one scrolls all the way down to the bottom of the page that one finds Sara Lee listed on a sign that reads "Other Brands."

Summary

I look forward to having DEMBF being acquired -- I was never a fan of owning a foreign stock. Not only are the commissions much higher, but the news flow is difficult for U.S. investors to follow.

As a former consumer of its pound cake, I'm disappointed to see Sara Lee listed as just another brand, and one that appears destined to continue shrinking at this meat-focused company. As an investor, it's hard to be disappointed. The day following the split, Hillshire closed at $28.99 and began paying a $0.50 annual dividend. And, like DEMBF, it hit an intra-day post-split high on Thursday. The gain on the Hillshire shares since the split has been more than 20%.

I don't expect Hillshire to perform anywhere close to the performance of Coach, and it may not even perform as well as the 13% per year return of Hanesbrands. Perhaps it's just inertia, perhaps it's the family history or because my investments in the food sector have been performing well lately, but for now, I intend to keep re-investing the Hillshire dividends and hold onto this stock.

Disclosure: I am long HSH, HBI, OTC:DEMBF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.