Bimbo: No, deal is not ‘too good to be true’

by Josh Sosland
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MEXICO CITY — In discussions recently with investment analysts, executives of Grupo Bimbo S.A.B. de C.V. insisted that a sharp reduction in the purchase price for the North American Fresh Bakery assets of Sara Lee Corp. was not “too good to be true.”

The conference call, held Oct. 24 with a transcript posted later, featured top Bimbo executives discussing both of its Sara Lee baking acquisitions — the North American business and the more recent agreement to acquire the Sara Lee Bimbo business in Europe.

In questions and answers, the executives were pressed to elaborate on the reduction in the purchase price to $709 million from $959 million agreed upon by the companies in November 2010. The price cut was associated with divestitures in eight markets that will be required as part of a consent agreement with the Department of Justice. But the price cut of 26% was far greater than the 8% reduction in prospective sales Bimbo said will result from the consent agreement. And the price cut of $250 million will be even greater when Bimbo sells assets in California, Pennsylvania, Oklahoma, Nebraska and the Kansas City area.

As an analyst put it in posing a question, “You’re effectively getting $250 million less of purchasing price a year later, which I think is, as we say, kind of too good to be true.”

Guillermo Quiroz, Bimbo’s chief financial officer, began his response by assuring the analyst “it is true” and went on to explain the outcome of the D.O.J. negotiations had been very unclear when the deal was reached with Sara Lee in November 2011.

“The way to understand this is that when initial negotiations were done there were basically — there were many possibilities, but basically two groups of them,” Mr. Quiroz said. “One was that the divestitures would come from a small brand, a small regional brand that added all together would make about the same amount of sales what — of course with different impact. And the other possibility that was the case was that divestitures would come from what we call Tier 1 brand foods, which means the most important brands to be acquired with Sara Lee, or our most important brands.

“What finally came out is what that we should divest the Sara Lee brands which are in California, which of course was considered to be a Tier 1. And the situation with that is that the impact of that divestment, although it can be measured very precisely in terms of sales, will also impact the rest of the deal with — from the strategic point of view. So more or less that’s the way to understand why the reduction in price was not proportionate to the direct amount of sales to be divested.”
Mr. Quiroz began the conference call with an emphatic point about the pending divestitures.

“We agreed to them because they do not alter the acquisition rationale or the value creation criteria we established going into the deal,” he said.

Discussing the pending integration of the Sara Lee acquisition, Mr. Quiroz tried to calibrate recent company comments to the effect that Bimbo will “hit the ground running” when the transaction closes.

“The goal obviously is to do it right and that is much more important than doing it fast,” he said.

Still, he said the company has a detailed and aggressive post-merger integration plan for the next six months.

“Our past experience has shown that rapid progress can be made to foster a culture of teamwork and cooperation, and the leadership of all organizations will be working close together with specific senior level roles and responsibilities already established,” he said.

Bimbo has adopted a motto of “Better Together,” and Mr. Quiroz said the “sum of our parts” will exceed what either B.B.U. or Sara Lee would have achieved independently.

“Furthermore, we will improve efficiency through a substantial $1 billion investment in the business over the next five years that will enhance the manufacturing process and improve the capabilities and commercial strength of the new B.B.U.,” he said. “We will add new and flexible modern bakeries like the one just built in Kansas, retrofit existing facilities to meet the market and make sure that our distribution network can reach every point of sale.”

Looking at the European business Bimbo is acquiring from Sara Lee, Daniel Servitje, Bimbo chief executive officer, said the transaction was made more attractive because Bimbo in Europe has “already undergone a comprehensive restructuring process over the last few years, which succeeded in streamlining the operation and reducing what were relatively high fixed costs in their structure, the benefits of which will be fully evident this year and next.”

Presenting an overview of the deal, Mr. Servitje said Grupo Bimbo is paying €115 million for the entire fresh bakery business on the Iberian peninsula of Europe, with 800 routes and 1,900 associates. With annual sales of €290 million, the company’s pro forma EBITDA is €17 million, equating to a 5.9% EBIDTA margin.

He described the valuation as fair, with multiples of 0.4 times sales and 6.7 times pro forma EBITDA “after giving consideration to certain cost-saving measures already initiated by Sara Lee.”

“What drove our acquisition was the ability to move forward on our vision of being the best baking company and to do so by entering a sizeable market through an established leader,” Mr. Servitje said. “Consider that in Spain alone, the bread market is €4.7 billion and because most of those sales are still in the traditional category, there’s growth potential for package branded products to capture share of volume. That is the strategy we know.”

Offering a financial summary of how the acquisitions will affect Grupo Bimbo, Mr. Quiroz projected revenues will grow to $12.3 billion from about $10 billion but that EBITDA will rise only modestly, to $1.3 billion from $1.2 billion. He said margins will narrow to 10.6% of sales from 12.2% but will recover later to 11.8% once synergies are achieved.

“It is clear for us that we will be in during the next two years an investment step, so we are willing to accept that short-term decline in our profitability to gain long-term profitability as well,” he said.

With the acquisitions, the company’s total routes will exceed 50,000, the total number of plants will be 155 and the number of total associates within the company will exceed 126,000.

The routes figure offers a good basis for demonstrating Bimbo’s vast prospective scale versus other major baking companies. The 50,000 routes worldwide (and a pro-forma estimate of 13,180 in the United States) compares with a total of 6,000 operated by Hostess Brands and 4,000 operated for Flowers Foods.

Geographically, the United States will account for 48% of Grupo Bimbo sales, up 9 points, with Latin America slipping to 11%, Mexico to 38% and Europe emerging at 3%.

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