A quick and dirty analysis of KKR's alleged offer for Sara Lee

Circularity On
Transaction value 12,000
Valuation date 7/3/2010

Key inputs - all figures in $mm, except per share data

Debt capacity (Debt / EBITDA) 6.0x
Year of exit 5.0yrs
EBITDA growth 3%
EBITDA exit multiple 8.8x
Interest rate on new debt 7%
Unlevered FCF / EBITDA 61%
MTR 37.70%
IRR 18%

© One-Eyed Capitalist (www.oneeyedcapitalist.blogspot.com) 10/05/2010

 Return sensitivity

Pre-tax cost of new debt

18% 6% 7% 8% 9% 10% 11%
4.0x 18% 18% 18% 18% 18% 18%
5.0x 18% 18% 18% 18% 18% 18%
EBITDA
Debt /

6.0x 18% 18% 18% 18% 18% 18%

7.0x 18% 18% 18% 18% 18% 18%
8.0x 18% 18% 18% 18% 18% 18%

EBITDA growth
18% 0% 1% 2% 3% 4% 5%
50% 18% 18% 18% 18% 18% 18%
Unlevered

55% 18% 18% 18% 18% 18% 18%

EBTIDA
FCF /

60% 18% 18% 18% 18% 18% 18%

65% 18% 18% 18% 18% 18% 18%
70% 18% 18% 18% 18% 18% 18%

Transaction value
18% 11,000.0 12,000.0 13,000.0 14,000.0 15,000.0 16,000.0
2.0 592% 133% 70% 40% 22% 9%
Year of exit

3.0 278% 83% 48% 30% 19% 10%

4.0 179% 62% 38% 25% 17% 11%
5.0 139% 55% 36% 26% 19% 14%
6.0 106% 43% 29% 21% 15% 11%
Sources Uses
Debt 10,872 91% Equity 9,691 81%
Equity 1,128 9% Net debt 2,309 19%
A quick and dirty 12,000 Total 12,000

Transaction value 12,000 Implied offer price $14.44

LT debt 2,734 Share price on Jul 03 2010 $13.99
Pension obligation 530 Implied premium 3%
Cash 955 Price / Earnings 21.6x
Net debt 2,309 TV / LTM EBIT 13.4x
SLE Equity purchased 9,691 TV / LTM EBITDA 8.8x
Basic shares outstanding 662
Diluted shares 9
Total diluted shares outstanding 671

No. of options Exercise price New shares

20,036 $15.79 0
9,014 $0.00 9.014
9.014
 For fiscal year ending June 30,
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cash flow analysis
EBITDA $1,234 $1,251 $1,359 $1,427 $1,442 $1,485 $1,530 $1,734 $1,623 $1,671 $1,722
Unlevered FCF / EBITDA 38% 83% 61% 70% 61% 61% 61% 61% 61% 61% 61%

Est. Unlevered FCF $472 $1,036 $829 $999 $879 $906 $933 $961 $990 $1,020 $1,050
Post-tax interest adjustment (115) (106) (92) (561) (538) (513) (483) (449) (411) (368) (320)
FCF to paydown debt 357 930 737 293 341 393 450 512 579 651 730

Beginning debt balance 10,872 7,861 7,519 7,126 6,676 6,165 5,586 4,935
Debt issuance / (repayment) (293) (341) (393) (450) (512) (579) (651) (730)
Ending debt balance 7,861 7,519 7,126 6,676 6,165 5,586 4,935 4,205

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Returns analysis
Entry / Exit equity value (1,128.0) – – – – 10,053.6 – – –
SARA LEE CORP
10-K
08/27/2010

INCOME STATEMENT

Dollars in millions except per share data June 28, 2008 June 27, 2009 July 3, 2010
Continuing Operations
Net sales 10,949 10,882 10,793
Cost of sales 7,008 7,038 6,692
Selling, general and administrative expenses 3,232 3,090 3,204
Net charges for exit activities, asset and business dispositions 39 103 84
Impairment charges 851 314 28
Contingent sale proceeds (130) (150) (133)
Operating income (loss) (51) 487 918
Interest expense 185 170 147
Interest income (80) (41) (24)
Income (loss) from continuing operations before income taxes (156) 358 795
Income tax expense 120 133 153
Income (loss) from continuing operations (276) 225 642
Discontinued Operations
Income (loss) from discontinued operations, net of tax expense of $453, $90 and $81 236 155 (199)
Gain on sale of discontinued operations, net of tax expense of $74,nil and $1 (24) 84
Net income (loss) (64) 380 527
Less: Income from noncontrolling interests, net of tax
Continuing operations 4 5 7
Discontinued operations 11 11 14
Net income (loss) attributable to Sara Lee (79) 364 506
Amounts attributable to Sara Lee
Net income (loss) from continuing operations (280) 220 635
Net income (loss) from discontinued operations 201 144 (129)
Net income (loss) attributable to Sara Lee (79) 364 506
Income (loss) from continuing operations per share of common stock
Basic (0.39) 0.31 0.92
Diluted (0.39) 0.31 0.92
Net income (loss) per share of common stock
Basic (0.11) 0.52 0.74
Diluted (0.11) 0.52 0.73