M&A Deals of the Year
Enter Downers Grove, Ill.-based food and consumer products conglomerate Sara Lee Corp. and Mexican bakery company Grupo Bimbo SAB de CV. Sara Lee had been engaged in an extensive restructuring, selling off its noncore North American food divisions and European household businesses. These included its North American bakery unit best known for the Grandma Sycamore's, Heiner's and Rainbo brands. The auction process for the bakery business began in the summer of 2010 with assistance from Bank of America Merrill Lynch. Grupo Bimbo, which already had a large presence in the U.S. with its Thomas' and Entenmann's brands, wanted to get larger. The result, announced in November 2010: The Mexican company picked up Sara Lee's baking assets for $959 million.
The timing made the deal a test case for the DOJ's antitrust unit and its new guidelines. After a DOJ review that dragged on for about a year, Grupo Bimbo was forced to sell a number of assets after the deal closed on Nov. 7. These included businesses in San Diego; San Francisco; Sacramento, Calif.; Kansas City, Mo.; Omaha; Oklahoma City; Scranton and Harrisburg, Pa.; and brands such as EarthGrains, Sara Lee, Healthy Choice, Holsum and Milano. The deal also had to be renegotiated, with the original purchase price slashed to $709 million.
Why was the bakery deal such a target? The original Oct. 21 DOJ complaint alleged that the two parties were leaders in the bread segment and that the deal would have given Grupo Bimbo more than half the sliced-bread market share in certain markets, including 63% in San Diego, 59% in Sacramento, 58% in Los Angeles and 56% in San Francisco. The complaint also argued that since the two companies' bread products are so similar in terms of taste and texture, the deal could have resulted in higher sliced-bread prices for consumers.
"The acquisition would eliminate the substantial head-to-head competition between [Grupo Bimbo] and Sara Lee for sliced-bread sales to retailers and consumers and allow [Grupo Bimbo] profitably to raise price and decrease the services that it provides to retailers in the relevant markets," the complaint argued.
The divestitures aimed to keep the combined company's market share under 50% in markets identified by the DOJ. The California assets must be sold to a single buyer, but outside the Golden State, they can go to different buyers, the complaint said. If the divestitures are not completed within the allotted time, a court-appointed trustee will be hired, at the expense of Sara Lee and Grupo Bimbo, to complete the process.
The sale of the California assets are expected to be wrapped up by February, according to a source, while the non-California brands will most likely be sold to strategic buyers by the end of January.
"You have to say these new guidelines are more honest," says Ropes & Gray LLP partner Michael McFalls. "The divestitures make a purchase price adjustment necessary if the parties agree to them."
Jones Day partner David Wales adds that the guidelines will not completely change how mergers are reviewed but will give the antitrust agencies additional resources to work with. The new guidelines confirm and formally legalize what the agencies have been doing over the past several years by using additional economic models such as diversion ratios and critical analysis to review deals. As a result, both buyers and sellers must submit additional financial information to regulators such as sales and market share data.
"You may see them rely more on these tools to help them push the envelope," Wales says. "If you think about it, the guidelines were out of date." Wales also believes the new analytical tools will help the agencies if they challenge a deal in court.
Palden Namgyal, who worked with Grupo Bimbo on its previous two deals, is leading an Atlas Strategic Advisors LLC team that is advising Grupo Bimbo on the divestiture process.
George Paul, Rebecca Farrington, Meytal McCoy and Noah Brumfield of White & Case LLP along with Mark Leddy and Jeremy Calsyn of Cleary Gottlieb Steen & Hamilton LLP are Grupo Bimbo's antitrust advisers.