Analyzing Breadland Shareholder Value

Shareholder Value

Breadland

2

Contents

• Breadland Performance versus Food Companies

• Breadland Performance versus RTE Companies

• Opportunities for Creating Additional Shareholder Value

• Appendix

Shareholder Value

Breadland

3

Companies with High ROE-Ke Spreads Tend to be Rewarded

Will High Market to Book Ratios

Value Creation Matrix

MVBV

ROE - Ke

High

High

Low

Low

High Value Adders

Low Value Adders

High Value Adders tend to be companies with either high earnings or high potential for earnings growth.

High Value Adders tend to be companies with either high earnings or high potential for earnings growth.

Shareholder Value

Breadland

4

Breadland's Market to Book was Above the Industry

Average in 1990 . . .

Name of Stock MV/BV P/E

Ralston 7.44 15

General Mills 7.09 22

Kellogg 4.22 21

Breadland 4.15 19

Heinz 3.79 15

Borden 2.62 13

Sara Lee 2.58 20

Hershey 2.53 19

Campbell 1.59 24

CPC International 0.98 18

Average 3.7018.6

Depending on which proxy is used (MV/BV or P/E), attaining parity with Kellogg could add between $71 MM and $410 MM in Shareholder Value.

Depending on which proxy is used (MV/BV or P/E), attaining parity with Kellogg could add between $71 MM and $410 MM in Shareholder Value.

1990

Source: Value Line, Wall Street Journal 9/12/91, Gemini Analysis (see appendix)1. P/E is from 1991.

1

Shareholder Value

Breadland

5

. . . and the Market to Book Has Been High in the Past Market to Book versus ROE-Ke Spread

Food Companies1988 - 1990

Source: Value Line, Gemini Analysis

MVBV

ROE - Ke

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

-20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00%

CP'90

S'90HY'90

HZ'90

CA'90

B'90

Q'90

R'90

K'90

G'90

CP'89

S'89HY'89

HZ'89

CA'89

B'89

Q'89

R'89

K'89

G'89

CP'88

S'88HY'88

HZ'88

CA'88

B'88

Q'88

R'88K'88

G'88

B = BordenCA = CampbellCP = CPC InternationalG = General MillsHZ = HeinzHY = HersheyK = KelloggsQ = BreadlandR = RalstonS = Sara Lee

Shareholder Value

Breadland

6

Contents

• Breadland Performance versus Food Companies

• Breadland Performance versus RTE Companies

• Opportunities for Creating Additional Shareholder Value

• Appendix

Shareholder Value

Breadland

7

Breadland Has Lagged Behind RTE Competitors in Achieving

High ROE - Ke SpreadsMarket to Book versus ROE-Ke Spread

RTE Companies1988 - 1990

ROE - Ke Spread (%)

Source: Value Line, Gemini Analysis

MVBV

G = General MillsK = KelloggsQ = BreadlandR = Ralston

KeyBreadland Strategy

• Be the Best

Breakfast

Company

Kellogg Apparent Strategy

• Strong International Sales

General Mills Apparent Strategy

• Leverage brands with line extensions

• Attack core industry segments

• Long run “year 2000” growth plan

Ralston Apparent Strategy

• Licensing products

• Private label

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%

Q'90

R'90

K'90

G'90

Q'89

R'89

K'89

G'89

Q'88

R'88K'88

G'88

Shareholder Value

Breadland

8

And Equity Analysts Have Questioned the Sustainability ofBreadland Earnings Growth

Breadland:"As the [sports beverage] category grows in the U.S., will it attract more competitors?"

— Dean Witter"Lower-than-expected results in its U.S. Grocery Division out to 1992." — Merrill Lynch

General Mills:“Leveraging brands is one of General Mill's strong points - just look at the success of Cheerios and Total line extensions.”

— Prudential

Kelloggs:"Driven by strong overseas operations. Sales were up 20% in 1990"

- Duff and Phelps“Clearly [overseas] is where the growth is, and Kellogg is wonderfully positioned to capitalize on it.”

— Prudential

Ralston:“Its calendar 1991 private-label gains only offset branded weakness… Ralston is doing what it can to survive and grow in a category in which it only has a modest share.”

— Prudential

Shareholder Value

Breadland

9

Contents

• Breadland Performance versus Food Companies

• Breadland Performance versus RTE Companies

• Opportunities for Creating Additional Shareholder Value

• Appendix

Shareholder Value

Breadland

10

Based on Breadland P/E, A $1 Million Profit Improvement CouldIncrease Shareholder Value by $11.4 Million

Company

Kellogg

General Mills

Breadland

RTE Sales

$4,200

$1,600

$441

Total Sales

$5,181

$6,448

$5,031

RTE % of Sales

80%

25%

9%

PE

21

22

19

1. 1990 Annual Report.2. 76,012,000 shares as of 3/31. Share price = $61.625 on 8/1/9Source: Benchmarking Analysis

$1,000,000 X (1-.40) X 19 = $11,400,000

IdentifiedCost Savings

Breadland Tax Rate

Breadland PE

AdditionalShareholder

Value

For every $1 million that is added to Breadland ' RTE profit, value for Breadland stockholder increases by .24%

$11,400,000

$4,684,239,5002

= 0.24%

1

Shareholder Value

Breadland

11

A $47 Million Profit Improvement Program in BBC Should

Increase Shareholder Value by at Least $532 Million

Business CaseProfit Improvement

Estimate

$616 MM

$84 MM

$532 MM$19 MMTax

$47 MM

Gen. MillsPE = 22

BreadlandPE = 19

$28 MM² ATOI

$63 MM² ATOI

$41 MM

$104 MM

Gen. MillsPE = 22

BreadlandPE = 19

$1,197 MM

$189 MM

$1,386 MM

Increase inShareholder Value

1. No Interest expense deducted yet.2. 1991 Breakfast Division P&L, 1991 Breadland P&L.

19.4% Profit Improvement

Migrationto ALL of Breadland

11

BBC DivisionIncrease in

Shareholder Value

BBC “As Is”

BBC if at “Best-in-Class”

19.4% ProfitImprovement

Total Breadland

Breadland “As Is”

Breadland if at “Best-in-Class”

Shareholder Value

Breadland

12

Improving BBC Profit by $47 MM Will Raise Breadland's

ROE by 2.6%

21.2%

23.8%

1990ROE

ProjectedROE

Source: Value Line, Business Case

Effect on ROE by BBC Profit Improvement:

ROE = Net Income + Profit Improvement • (1 - tax rate)

Average Stockholder Equity

228.9 + $47 MM (1 - .40)

$1,078 MM

ROE Improvement

23.8% =

27.1%

Effect on ROE by Total Breadland Profit Improvement:

ROE = Net Income + Profit Improvement • (1 - tax rate)

Average Stockholder Equity

228.9 + $104 MM (1 - .40)

$1,078 MM27.1% =

BBCProfit

Improvement = $47 MM

Breadland Profit Improvement = $104 MM

Shareholder Value

Breadland

13

Breadland Could Break Out of the Middle of the Pack by Increasing its ROE - Ke SpreadMarket Value vs. ROE - Ke

1990

ROE - Ke

MarketValue($MM)

Low ValueLow Returns

Medium ValueMedium Returns

High Value Medium Returns

Medium ValueHigh Returns

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0% 5% 10% 15% 20% 25% 30% 35% 40%

Hershey

Breadland

Borden

Sara LeeCampbellSoup

CPC International

Kellogg

Heinz

General Mills

Ralston

Shareholder Value

Breadland

14

Hot Cereals Contributed the Most to Breadland MarketValue

Breadland Market ValueShare Price 9/25/91 $58

Common Shares Outstanding x 76,537,000shares

Total Market Value $4,439 MM

Breadland Market ValueShare Price 9/25/91 $58

Common Shares Outstanding x 76,537,000shares

Total Market Value $4,439 MM

Hots$912 MM

RTE$609 MM

Wholesome$580 MM

Canada - $146 MM

Other BBC- ($143 MM)

Frozen - $139 MM

Food Service - $308 MM

Pet Foods - $337 MM

Golden Grain - $248 MM

Gatorade$762 MM

Van Camp - $112 MM

Pritiken & Other - $131 MM

Other

USGP$4,141 MM

North American BBC

$2,104 MM

GroceryServiceDivision

$1,767 MM

Shareholder Value

Breadland

15

Contents

• Breadland Performance versus Food Companies

• Breadland Performance versus RTE Companies

• Opportunities for Creating Additional Shareholder Value

• Appendix

Shareholder Value

Breadland

16

Appendix: Calculations

p.5 If Breadland attains Kellogg's MV/BV of 4.22, $71 million will be added to market value.

Increase in shareholder value = ( MV/BV) • (Breadland Book Value)

MV/BV = (Kellogg - Breadland)

= .07

Market Value = (.07) • Breadland Book Value

= (.07) • $1019 million

= $71 million

If Breadland attains Kellogg's P/E of 21, $410 million will be added to market value.

Increase in shareholder value = ( P/E) • (Breadland Book Value)

MV/BV = (Kellogg - Breadland)

= 2

Market Value = 2 • Breadland Earnings

= 2 • $205 million

= $410 million

Shareholder Value

Breadland

17

Appendix: Calculations (cont'd)

p.12

BBC Division Increase in Shareholder Value

BBC contribution to increase in shareholder value

= (BBC ATOI Improvement) • (1-tax rate) • Breadland PE

= ($47 MM) • (1-0.40) • 19

= $532 MM

Total Breadland Increase in Shareholder Value (Assumes 19.4% improvement in ATOI across all of Breadland

Total = (Breadland ATOI Improvement) • (1-tax rate) • Breadland PE

= ($104 MM) • (1-0.40) • 19

= $1,197 MM

1

1. From Business Case

Note: $47 MM improvement in profit for BBC => 19.4 %

For total Breadland this implies 19.4% • 533 MM = $104 MM.

$47 MM

$242 MM