Actually, you drop the bat (pressing Z on the GC while in midair) onto the Sandbag and does a Dair (or some attack that sends it down) for it to stay.
It can be practiced well on Training mood in abour 1/2 or 2/3 speed. Take up a bat and a Sandbag, and short-hop over the Sandbag, drop the bat and immediatly do an attack that sends it down. (: I think some characters doesnt need to short-hop, but characters with high jumps are recomended to do it, otherwise the Sandbag will be send flying by the bat drop.
Now when you get the hang of it, you can start doing it in real-time and get the exact timing of the bat drop and the attack. It takes awhile to get the hang of it, but once you do it will send the Sandbag MILES.