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Friday, July 21, 2006

Sara Lee Approved the Hanesbrands Spin-Off

Stock Tickers: SLE, HBI

We have discussed this spin-off of Hanesbrands from Sara Lee Corp. (SLE) before this, and shareholders have been expecting this to occur. Yesterday, Sara Lee's (SLE) board of directors has approved the capital structure for the planned tax-free spin-off of its apparel business into a separate publicly traded company called Hanesbrands Inc. under the ticker "BHI." Hanesbrands will borrow $2.6 billion to establish the enterprise as a stand-alone, independent company. In connection with the spin-off, Sara Lee will receive a one-time payment of $2.4 billion from Hanesbrands.

After the spin-off of the apparel business, current Sara Lee shareholders will own stock in a more cash-rich Sara Lee and in a leveraged Hanesbrands. Anyone want a muffin with that underwear?

Sara Lee will distribute shares tax-free on all of the outstanding shares of Hanesbrands common stock, with the distribution ratio to be determined shortly before the spin-off occurs. So the ratio hasn't been set yet, and that may add to some nervousness. The fact that the company is making such a large debt and paying out the bulk of the borrowing is also more beneficial to Sara Lee than it is to Hanesbrands.

Neither company will be retaining any ownership interest in the other and this should be completed by early September. This is of course subject to market conditions and regulatory approvals. The company expects to announce a mid-to late-August record date for the spin-off in a future press release. There has also been a market rumor that a private equity firm has been hiding in the halls to strike a deal, but for now it appears the board is going the route of a spin-off.

This will also affect Index Funds' trading activity as Sara Lee is a member of both the S&P 500 Index and the S&P 100 Index, as the market cap may be reduced in shares of SLE as the spin-off takes place.

Jon C. Ogg
July 21, 2006

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