Sara Lee Shares Fall; Investors Wary of Plan to Split

Shares of Sara Lee took a beating Friday after the company announced a controversial plan to split in two.

Sara Lee
Sara Lee

The announcement came after weeks of bidding from suitors including a consortium led by private-equity firm Apollo Global Management, and a partnership between Blackstone Group and Brazilian meat processor JBS.

Shares of Downers Grove, Illinois-based Sara Lee fell 2.66 percent to close at $17.17. Click here for after-hours quotes for Sara Lee shares.

The company is planning a spinoff of its North American retail and meat processing divisions from its baked goods and drinks brands, a move it expected to be more tax-efficient than an outright sale. Sara Lee claims shares of the separate companies would trade higher than the current price for the combined units.

In addition, the company's management pledged to pay shareholders a $3-per-share cash dividend next year. The announced plan, agreed only "in principle," faces steep taxes associated with spinning off international divisions. The company has hired CEO Marcel Smits to oversee the reorganization.

“We have carefully considered various strategic alternatives, including unsolicited indications of interest in the company,” Sara Lee Chairman James Crown said in a statement. “We believe that the spinoff, plus the one-time special dividend, offers the greatest potential for delivering long-term shareholder value.”

Investors on management’s conference call were skeptical of that rationale, however. Reports of offers as high as $21 a share have been circulating in the media. JBS and Blackstone’s offer even included a split of the coffee divisions from the meat processing units—not unlike what the company is proposing. They made a firm offer of $17.50 a share last month, and were contemplating beefing it up to something around $20 a share, according to a source familiar with the bidding.

An alternative to the JBS/Blackstone bid was an offer from the Apollo-led group, which includes TPG Capital and Bain Capital. This consortium was noodling an offer of $18 to $19.75 per share, a source familiar with the bidding told CNBC. That’s a quarter shy of the $20 Sara Lee’s board set as a floor, down from an original asking price of $22 last August.

Apollo’s bid came with a hefty dose of leverage: $8 billion, or five times the company’s operating earnings. Sara Lee may not have liked the idea of leaving management choices to a group of financial investors, the source told CNBC.