Sara Lee Corporation announced that it has entered into an exclusive negotiation period with an affiliate of Sun Capital Partners, Inc. regarding the sale of its branded apparel business in Europe. As the parties further their discussions, Sara Lee will consult with employee representatives from the appropriate works councils regarding the potential sale.
Sara Lee Courtaulds, the U.K.-based division that manufactures private-label clothing for retailers, is not part of the potential sale. The company will continue to assess its options in regard to the Sara Lee Courtaulds business, which generated nearly $560 million in sales in fiscal year 2005, which ended July 2, 2005.
“The intended sale of the branded apparel business in Europe – which includes great brands such as Dim, Playtex, Wonderbra, Abanderado, Nur Die and Unno – is an important step toward simplifying our portfolio and focusing on growing our core food, beverage, and household and body care businesses,” said Brenda C. Barnes, president and chief executive officer of Sara Lee Corporation. “We look forward to productive and collaborative discussions with the works councils associated with the European branded apparel business.”
Sara Lee's apparel organization in Europe includes branded businesses in France, Germany, Italy, Spain, the United Kingdom and throughout Eastern Europe, and generated nearly $1.2 billion in sales in fiscal year 2005.
“Regardless of whether a proposed transaction with Sun Capital Partners is executed, we remain confident in our transformation plan, including our ability to return value to our shareholders through maintaining the fiscal year 2006 dividend and implementing our $2 billion share repurchase program as well as focusing on debt repayment and investment in our core businesses,” added Barnes.
Impairment Charges
Although a definitive sales agreement has not been executed, on Sept. 23, 2005, Sara Lee's board of directors authorized management to negotiate and enter into a definitive agreement to sell the company's European branded apparel business and, on Sept. 28, 2005, the company agreed to an exclusive negotiation period with an affiliate of Sun Capital Partners, Inc. (Sun).
During the quarter and year ended July 2, 2005, the company previously recognized an impairment loss of $305 million in the European apparel business, with $182 million related to goodwill and $123 million related to indefinite lived trademarks. As a result of differences between the potential transaction terms approved by the board of directors and other nonbinding bids previously received for the business, the company conducted another impairment review of the European apparel business and determined that an additional write down of the business was required. The potential transaction will result in the business being classified as held for sale, and an associated material impairment will be recognized in the company's financial statements for the first quarter ending on Oct. 1, 2005. The exact amount of the impairment to be recognized will depend upon the terms of any definitive agreement entered into with Sun, Sara Lee's investment in the business at the time of the sale and the amount of cash that Sara Lee receives at closing. The potential transaction reviewed by the board of directors includes contingent payments, which were not considered in determining the amount of the impairment charge.
However, based upon the company's Sept. 3, 2005, financial statements, the impairment to be recognized in the first quarter of fiscal 2006 is expected to approximate $165 million and result in the remaining intangible assets and property of the business being written down to zero. The impairment charge to be recognized in fiscal 2006 will not result in the expenditure of cash and is incremental to the amounts disclosed in the Form 8-K filed by the company on July 20, 2005.
In addition, if the proposed transaction is executed, it is probable that the company will be required to fund certain pension obligations. Although the exact amount of cash to be contributed will depend upon the funded status of the plans and foreign exchange rates at a future period, the company previously estimated that the cash contribution could approximate $65 million. The wind up of these pension plans also may result in the purchase of annuities for the impacted employees and the future settlement of these obligations would likely result in a loss.
