Fitch: No Immediate Rating Impact from Flowers Foods' Bid for Certain
NEW YORK -- January 14, 2013
Fitch Ratings does not expect to take any immediate rating actions based on
Flowers Foods, Inc.'s (Flowers; NYSE: FLO) announcement that it bid $390
million for certain brands and related fixed assets in the fresh bread
category from Hostess Brands, Inc. (Hostess). Hostess is under bankruptcy
court oversight. The bid must be approved by the Hostess bankruptcy court
which would then open the bids to a competitive auction process.
If the company is successful near its current offer and much of the
acquisition is debt financed, leverage (total debt/EBITDA) would increase
materially from 1.9x for the last 12 months (LTM) ended Oct. 6, 2012. Flowers
has a fair amount of rental expense given that it leases a substantial portion
of its distribution facilities, thrift store locations and equipment to grow
its business. As a result, rents add more than one turn to leverage and thus
Fitch focuses on EBITDAR as a primary measure of leverage. Debt/EBITDAR, which
was 3.0x for the LTM, would also be higher pro forma for this transaction. LTM
leverage is viewed as temporarily high. There is less than one quarter of
revenues and EBITDA from the $370 million acquisition of Lepage Bakeries, Inc.
(Lepage) acquisition in July 2012 but all of the related debt.
Financing plans, synergies and earnings/cash flow projections will be assessed
by Fitch if Flowers wins the bids for Hostess' bread brands. Given the
company's commitment to maintain strong credit protection measures, Fitch
expects Flowers to focus on reducing its leverage within 18 to 24 months of a
transaction closing. If credit metrics are likely to return to pre-acquisition
levels within two years of closing, Fitch may affirm the company's ratings.
Conversely, if Flowers is likely to maintain (Debt/EBITDAR) leverage over 3.0x
in the intermediate term, it could lead to a negative rating action.
This potential acquisition dovetails with Flowers' strategy. In 2011 Flowers
announced that it was accelerating its growth strategy to serve 75% of the
U.S. population by 2016 from 61% at the end of 2011. The bakery industry is
consolidating and large national participants have declined from approximately
eight in 2000 to three today (excluding Hostess). Flowers' intent is to
participate in the industry's consolidation in a meaningful way. It is also
expected that acquisitions would likely be funded with debt and leverage could
increase materially. The company reached 70% of the population target with the
Lepage acquisition and smaller acquisitions from Grupo Bimbo in 2012. However,
the Hostess acquisition would cement Flowers' national footprint in a more
cohesive manner. At the current bid, Flowers expects the acquisition to be
accretive to earnings in 2013.
Flowers' current ratings reflect its leading position in baked goods in the
U.S. and its No. 1 market share in the southern U.S. - the primary market in
which it competes. The company's credit protection measures historically were
very strong. Leverage (debt/EBITDAR) had been less than 2.5x in each of the
past five years through 2011. However, with the Lepage acquisition in June
2012 leverage trended upward, and a Hostess transaction would push leverage up
Fitch currently rates Flowers as follows:
--Issuer Default Rating (IDR) 'BBB';
--Revolving Credit Facility 'BBB';
--Term Loan A 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Fitch Affirms Flowers Foods' IDR at 'BBB'; Outlook Stable', March 28, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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