Milling & Baking News - August 16, 2005 - 40

B U S I N E S S

Moody's and Fitch take dim view
of Sara Lee stock repurchase plan
NEW YORK - Sara Lee Corp.'s plans
to repurchase $2 billion in company
stock as well as declining unit volume
across all the company's operating segments led two credit ratings services to
lower their outlook for the St. Louisbased company.
Moody's Investors Service on
Aug. 4 affirmed the A3 long-term
debt rating and Prime-2 short-term
debt rating of Sara Lee and its subsidiaries, but changed the outlook to
"negative" from "stable."
"The ratings affirmation reflects
expected improvement in operating performance resulting from cost
savings initiatives and dispositions
of non-core businesses, as well as the
planned use of a material portion of divestiture proceeds to maintain debt protection measures," Moody's said. "The
change in outlook to negative reflects
recent soft performance in the core meat
and bakery businesses, continued decline in performance in the non-core U.S.
coffee and European apparel businesses,

and the company's decision to use a significant portion of divestiture proceeds
to fund $2 billion in share repurchases
rather than debt reduction."
As part of its rating actions, Moody's
affirmed Sara Lee Corp.'s senior
unsecured long-term rating at
A3 and short-term rating at
Prime-2, while affirming The

Earthgrains Co.'s senior unsecured
long-term rating at A3.
"Sara Lee's ratings are based on
its diversified portfolio of branded
products with leading positions in
their respective categories," Moody's
said. "The ratings also reflect declining performance in key categories, as
well as the company's plan to divest

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42 / Milling & Baking News, August 16, 2005

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several of its non-core businesses."
Moody's added that the Aug. 4 announcement "reflects a more aggressive
financial policy than Moody's had assumed, and comes at a time when core
meat and bakery businesses continue to
face challenges due to intense competition and high commodity prices."
Moody's said the negative outlook
reflects Sara Lee's current weak positioning in the A3 rating category, the
foregone opportunity to use proceeds
from divestitures to improve debt protection, and recent poor performance
in the meat, bakery and European
branded apparel businesses.
"In Moody's view, there is a
reduced probability that the company will be able to improve debt
protection measures to levels that
are more appropriate for its current rating," the credit ratings service
said. "If retained cash flow to net debt
(based on Moody's standard analytic
adjustments) falls below 16% or EBITA
margin (based on Moody's standard
analytic adjustments) falls significantly
below 9%, a downgrade could occur.
The company's ratings could also be
downgraded if key aspects of the transformation plan, including timing of
planned divestitures, deviate unfavorably from the plan, or if the company
were to apply a greater proportion of divestiture proceeds to share repurchases
rather than debt reduction.
"To return to a stable outlook, Sara
Lee will need to demonstrate progress
in achieving the goals of its transformation plan, as well as an appropriately prudent financial policy, such
that retained cash flow to net debt can
be sustained above 20% and EBITA
margin above 12%."
Chicago-based Fitch Ratings also
downgraded Sara Lee following the
release of fiscal 2005 results. Fitch downgraded Sara Lee's senior unsecured debt
rating to BBB+ from A and commercial
paper rating to F2 from F1. Fitch maintained its "stable" rating outlook.
"The stable outlook reflects the
company's portfolio rationalization
as planned and that there will not
be any material changes in its financial strategy in the near term," Fitch
said. "The outlook also incorporates
the maintenance of high levels of
liquidity. Given the amount of operational activity associated with Sara
Lee's transformation, execution risk
continues to be above average. Ratings could change if there are material
deviations from Sara Lee's current plan,
unanticipated changes in its cash balances or further material changes in its
capital structure." MBN
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http://www.bakingbusiness.com http://www.world-grain.com
Milling & Baking News - August 16, 2005

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