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Sara Lee Drops on No-Takeover Report (Update)

UPDATE: The Sara Lee story: it is likely about price and inflation

TheDeal.com report that a sale of SLE is unlikely dropped the stock about 4 percent. Reports abound that the Board is meeting today to consider selling pieces of the company, such as the meat or coffee division, or breaking it into separate pieces.

The likely problem: inability to agree on a price.

Why? Because food companies are in a tough environment, an environment that cannot be easily changed just by getting bigger.

The big issue for food companies: inflation.

Bernstein, in a recent note to clients, noted that cost of goods sold (COGS) inflation will average 6.7 percent for 2011 for the large food companies like SLE, Kraft , Kellogg and Campbell's . That is up from a 5 percent estimate that was done in October and way above the 3-5 percent sweet spot preferred by many management teams, they say.

Knock-on effects:

1) commodity inflation causes food stocks to underperform because margins get hit

2) when food prices go up, private labels gain market share

3) innovation becomes more important: the ability to raise prices often depends on the ability to introduce new products, rather than renovate existing ones.

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Sara Lee was down as much as 4 percent Thursday on a story in TheDeal.com that a sale of the company appears unlikely, citing unnamed sources.

The company has been widely believed to be a takeover target, or that it might separately sell its meat or beverage businesses. A number of players, including Apollo Global Management and KKR, have reportedly expressed interest in a buyout.

Recall that CEO Brenda Barnes stepped down in August for health reasons.

Though SLE has many well-known brand names (Jimmy Dean, Hillshire Farm), it's a tough sell: the food business is highly competitive, and as we have seen in other companies, it is tough to get pricing power. Higher commodity costs, as has been widely reported, add to the uncertainty.

More:

'Fast Money' Traders: What Commodities Are Saying Now

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