Brazil's Latest Foray Into U.S. Acquisitions: JBS to Take Sara Lee?

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Includes: EWZ, HSH, JBSAY
by: Wall St. Cheat Sheet

By Joanna Bromley

Yet another food deal is in the making. JBS SA (OTCQX:JBSAY), a Brazilian meat-processing company, is currently in takeover talks with Sara Lee (SLE), the familiar processed foods producer. While these talks have been going on for months, apparently Sara Lee is now getting serious.

JBS: A Meaty Past, a Meaty Future?

JBS, the meat powerhouse, has humble roots. The company began as a butcher shop in the 1950s, and eventually became a slaughterhouse. In the 1990s, JBS really gained its footing during Brazil’s economic expansion by acquiring twelve meat-packing companies.

JBS has also expanded its global footprint, starting in 2005. It acquired U.S. meat packer Swift & Co. in 2007, Smithfield Beef in 2008, and chicken producer Pilgrim’s Pride in 2009.

Sara Lee: A Not-So-Meaty Past, but a Meaty Future?

Sara Lee, on the other hand, has been all over the place since its founding in 1939. We all know Sara Lee for its familiar brands, including Jimmy Dean and Hillshire Farms. However, what you may not know is that Sara Lee was once heavily involved in the personal care business, and intimate apparel.

Sara Lee was initially involved in food processing, packaging, and distribution. The Sara Lee namesake stemmed from the 1956 acquisition of Kitchens of Sara Lee. In the 1950s and 1960s, Sara Lee expanded into the retail food business by acquiring supermarkets, canned goods companies, and meat companies.

This focus changed in 1966 with Sara Lee’s first acquisition of a non-food company, Oxford Chemical Corporation. Sara Lee then decided to enter both the personal care business and the lingerie business, which came back to haunt it later.

The next few decades involved acquisitions of both food and non-food companies. Sara Lee underwent several restructurings, the most recent of which involved divesting a bunch of these non-food companies, including apparel (Hanes and Playtex), European meats, U.S. retail coffee, and its direct selling business. So now, after selling a bunch of its businesses, it’s time for Sara Lee to sell itself.

Sara Lee continues to struggle. Its most recent CEO, Brenda Barnes, was appointed in 2005 but stepped down over the summer after suffering a stroke. The board has not yet chosen a successor or a strategic direction for the company’s future. In fact, Sara Lee may not sell itself. It may just break up its core businesses and spin them off.

JBS is targeting Sara Lee’s most treasured assets, including its high-margin coffee business and its growing brands in emerging markets.

The Emerging Markets Angle

This story is much more about Brazil than it is about food. You see, Brazil has recently been muscling its way into the United States acquisition world, with such deals as InBev’s (NYSE:BUD) $46.3 acquisition of Anheuser-Busch in 2008 and 3G Capital’s $3.3 billion acquisition of Burger King in 2010.

Let’s take that another step: this story is really much more about emerging markets than it is about Brazil. Emerging markets, Brazil included, have long eyed U.S. companies. Now they can both look and touch: companies such as JBS, which possesses the majority market share at home and benefits from strong local currencies, are now strong enough to take a bite out of the U.S.

According to Dealogic, companies in China, India, Brazil, and the Middle East have spent a total of $135 billion in the past five years on their top 50 acquisitions in the U.S.

Possible issues with this potential deal? JBS and Sara Lee have similar market capitalizations (approximately $11 billion), which may make it difficult for JBS to finance the acquisition.

Disclosure: No positions in the stocks mentioned.