Sara Lee: Announces Revised Capital Plans

Downers Grove / IL. (slc) Sara Lee Corporation announced that management and the Board of Directors have revised its capital plans. The company is providing new targets for dividend policy and further clarity on the use of proceeds of the International Household and Body Care (H+BC) sale.

«Two weeks ago we reported strong first half results, which allowed us to increase our guidance for the second time this fiscal year, and at the same time accelerate second half investment in growth opportunities. In addition to our strong operating performance, the capital plans and targets set out today are designed to drive significant shareholder value», said Sara Lee chairman and chief executive officer Brenda C. Barnes. «With the H+BC sale process well under way, we have good visibility on the proceeds, and expect to begin receiving them soon. At this time, we firmly believe that the best use of these funds is to buy back Sara Lee shares, which will be accretive to earnings per share. While maintaining a solid investment grade credit profile, we estimate that we can buy back around 2,5 to 3,0 billion USD of stock over a three-year period. The plan is to front-load the repurchases, initially buying approximately 1,0 to 1,3 billion USD of shares by the end of this calendar year. We are committed to driving strong growth in future years, and combined with aggressive share repurchase, we anticipate significant improvement in earnings per share».

«We expect to maintain and gradually increase our current 0,44 USD per share annual dividend after the sale of H+BC», Barnes added. «The Board of Directors will continue to evaluate the best opportunities for value creation, and investment of our cash, through potential acquisitions or other investments in the company´s growth. However, at this time, the Board has increased our share repurchase program to 3,0 billion USD to support our intention to begin aggressively repurchasing shares in the near future».

Liquidity and debt

Sara Lee is committed to a solid investment-grade credit profile. To this end, the company targets metrics commensurate with a solid investment-grade rating. The company plans to reduce pension under-funding by making a 200 million USD cash contribution early in fiscal 2011.

Share repurchase

Sara Lee has received binding offers for its Body Care business from Unilever and its Air Care business from P+G for a combined 1’595 million EUR. These offers represent approximately two-thirds of the H+BC business, and Sara Lee is highly confident about its ability to sell the remainder. In addition, at the end of the second quarter, Sara Lee had cash on its balance sheet of 1,3 billion USD, which will now be used to implement part of the company’s share repurchase plans.

Sara Lee expects to begin buying back shares in the near future and anticipates that it will repurchase 1,0 to 1,3 billion USD of shares in calendar 2010, though that amount will not exceed 500 million USD until the company receives the proceeds from selling its Body Care business to Unilever.

Dividend

The company will continue to target a dividend payout ratio of 40 to 50 percent of net income, excluding significant items. Following the sale of H+BC, the company expects to maintain and gradually increase its 0,44 USD per share annual dividend.

Taxation

The H+BC proceeds will be subject to transaction cash taxes of approximately ten percent of the proceeds. Repatriating will lead to incremental cash taxes of approximately 20 percent. Repatriating any or all of the 1,3 billion USD of cash currently on the balance sheet will lead to a repatriation cash tax expense which should not exceed 25 percent.

As a result of this announcement, and in accordance with U.S. GAAP, Sara Lee will take a book tax charge in the third quarter of fiscal 2010 relating to the deemed repatriation of both the existing overseas cash on the balance sheet and the book value of the H+BC business. We estimate the charge to be approximately 550 million USD, but the actual amount will be calculated based on balances as of the end of the third quarter of fiscal 2010. This charge results from the company no longer having specific plans to indefinitely post-pone repatriation of its current overseas cash or the current book value of its investment in H+BC. When individual H+BC sale transactions close, a repatriation tax related to the gain will be booked.

Guidance

At this time, the company is not providing any new guidance, as the amount and timing of any potential share repurchase or significant items is uncertain. However, the earnings per share guidance reported by the company on February 04, 2010 is expected to be impacted by the tax provisions described above and lower shares outstanding, as repurchases are completed.