Barry Beracha:

“Creating Value through Spin-Offs” delivered at UM-St. Louis

transcribed by Liz Shahnam

1. Values of Earthgrains

• Willingness to change, adapt and be flexible
• Young, still establishing identity
• Proactive
• Growth centered around technology and science

2. Spin-off Phenomenon

Wall Street has recognized the affinity for spin-offs it as a phenomenon. Why wouldn’t AB hold onto Earthgrains and get the value? Because Earthgrains as a business is very different from that of AB, and is best handled as its own company. (Peter Lynch has described the late-80’s phenomenon of acquiring unrelated businesses not as diversification but rather as diworsification.”) We note that there is market value created through spin-offs, as is evidenced by the fact that in 1990-96 $190 billion created through spin-offs

Local examples of spin-offs include Emerson, May Company, Monsanto (Solutia). Therefore spin-offs are a key factor in creating value

The spin-off momentum opposes the diversification trend of the 1980’s (Earthgrains provides stability, growth, reduced risk through business cycles). The 1990’s is the era of strategic focus on core competency and critical mass. Conglomerates are de-coupling focusing on a “pure play” company from an investor perspective.

4. Why spin-off?

• Future value must be greater than current market value
• Both parent and spin company benefit
• Tax efficient as many spin transactions are not taxable events
• Increased shareholder value

We note that Wall Street shows that spins outperform the market in general by 30% over its first 3-4 years.

5. Principals of value creation:

• Vision-strategy
• Focus on strategic offerings: measurable, tracked and accountability
• Flexibility to adapt to changes in market place and opportunities
• Rewards that motivate management and workforce.

6. Earthgrains History

• Acquired in 1982 (formerly known as Campbell-Taggert)
• July 1995 AB announced spin-off
• 3/27/96 spin completed

7. Why Spin Earthgrains?

• Strategic fit (or lack thereof)
• EG has distinct financial, investment and operating characteristics from those of AB
• The exigencies of the baking industry are better met as an independent company
• Potential value of the company is greater as a spin
• Baking industry challenges:
• Focus o volume instead of margin
• Lack of pricing discipline
• Local economies of scale
• Slow pace of technology innovation
• Few industrial player publicly held
• No strong industry leader

Prior to the spin, the baking industry was not followed by Wall Street.

8. Earthgrains Strategy

• increase revenues and margins
• offer quality, value, and variety of products to consumers
• enhance customer satisfaction
• reduce and control costs
• participate in industry consolidation trend

Revenues in 1996 are $1.663 million, with 78% domestic, some international. EG is the 2nd largest US refrigerated dough manufacturer in the U.S. In MO it’s #2. #1 bagel in MO

Refrigerated dough produces private label refrigerated dough and toaster pastries in two plants. There is national distribution and quality meets or exceeds the competition (primarily Pillsbury).

International operations

• Bimbo: largest commercial baker in Spain. 8 bakeries in Spain and Canary Islands
• Europe: only producer of canned dough in Europe

9. Stock performance:

• S&P500 up 47%
• BUD up 37%
• EG up 180% (Recognized as a turnaround, with its 6th consecutive quarter of increasing earnings)
• Also, baking industry showing improved fundamentals

10. Value Creation

Use focus, flexibility, rewards (to apply to all businesses)

Focus

• business strategy understood throughout company
• objectives aligned with accountability
• measurements in place

It’s the most important driver of value creation. We note that we are implementing SAP’s integrated manufacturing as a means of using technology to enhance business processes.

Flexibility

• management decision-making
• response to market conditions
• seize opportunities

Flexibility is indicated by:

• Strong balance sheet (modest debt level)
• Ability to take advantage of industry consolidation
• Major acquisition pending before FTC
• R&D/new products
• Acquired Heiner’s Baker

Rewards

• Retain/motivate workforce
• Link behavior to strategy and goals

1. Push rewards down (401K, employee purchase plan, stock options)
2. Direct relationship to company performance
3. Tied to profitability focal points and stock price performance

Summary

• spin-offs are win-win
• spin-offs can create value
• Value created through
• Vision-strategy
• Focus
• Flexibility
• Rewards
• Principals apply to all businesses

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