Sara Lee International Beverage and Bakery: What Happened To That Classic Company? – Hillshire Brands Co (HSH)

From Sara Lee’s last closing price of $24.76 per share, Hillshire has appreciated by about 30.3 percent. Relative to Hillshire’s debut price of $28 per share, it has delivered a premium of 15.2 percent. During the same period, the S&P 500 has gained roughly 14 percent. In other words, the pre-deal premium has beaten the broader market’s performance by a factor of two.

Although the post-deal premium has essentially matched the broader market’s performance, it is notable that Hillshire’s stock briefly bounced off of Sara Lee’s pre-deal lows in early August of 2012. This enabled investors who missed the pre-deal arbitrage opportunity to pick up Hillshire at a significant discount and ride it for a substantial gain.

Long-Term Prospects and Future Growth Potential

At this point, it appears likely that D.E. Master Blenders will remain independent for several years to come. By contrast, Hillshire Brands has already sparked takeover speculation among market-watchers. In particular, Springdale, Arkansas-based Tyson Foods, Inc. (NYSE:TSN) appears well-positioned to subsume the smaller company into its operations. As one of the world’s largest independent producers of chicken products, Tyson would find a natural complement in Hillshire’s pork-centric offerings.

However, Tyson is encumbered by a fair amount of debt. Any theoretical buyout would be complicated by the need for Tyson to find a source of leverage. Additionally, Hillshire’s share-price strength has rendered it less attractive as an immediate takeover prospect. In fact, prospective buyers would be imprudent to act before seeing multiple quarterly earnings reports. Given these constraints, a buyout announcement is unlikely to come before the latter half of 2013.

Investors who purchased Hillshire shares in the aftermath of its spin-off from Sara Lee have been handsomely rewarded. Although the performance of D.E. Master Blenders has been less noteworthy, the long-term survival of Sara Lee’s former European division appears to be assured. Depending upon the strength of these companies’ coming earnings reports, they may yet offer attractive buying opportunities at their current levels. Opportunistic investors would do well to make targeted purchases on any signs of share-price weakness.

The article What Happened To That Classic Company? originally appeared on Fool.com and is written by Mike Thiessen.

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