Sara Lee Corp's credit spreads remain prone to weakness amid fears the company could succumb to a leveraged buyout, yet analysts are divided on the likelihood a deal will get done.
The company posted a higher quarterly profit on Thursday as new products such as entree salads and whole grain white bread, as well as the weaker dollar, helped lift sales more than 9 percent.
Its credit spreads widened, however, after management on a conference call appeared unswayed by shareholder pressure to accelerate share buybacks, which would likely lower the company's chances of being acquired in a leveraged buyout.
"Despite numerous calls for an immediate accelerated buyback program, management is sticking to its guns with a long-term goal of $3.5 - $3 billion of repurchases to be completed at its leisure, by 2010," CreditSights analyst James Goldstein said in a report.
If Sara Lee accelerated its share buybacks it may be less attractive to private equity buyers because the buybacks would likely raise the company's share price, making it more expensive.
The cost to insure Sara Lee's debt with credit default swaps rose by around 3 basis points to 48 basis points, or $48,000 per year for five years to insure $10 million in debt.
But Goldstein argues that the company may already be expensive and has a "marketweight" recommendation on the company's debt. "While Sara Lee is starting to turn the ship around, we still view the company as an expensive takeout target, and note that much work and expense remains in the turnaround plan for margin growth," Goldstein said.
"While the earnings turnaround at Sara Lee is far from complete, the company does appear dedicated to reducing debt loads with cash on hand, and - while LBO or recapitalization risk can never be fully ruled out in today's market - current spreads offer a modicum of yield in an increasingly tight market for investment grade food and beverage debt," he said.
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