Fitch holding off on ratings actions on Flowers

by Eric Schroeder
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NEW YORK — Fitch Ratings said it does not expect to take any immediate rating actions based on Thomasville, Ga.-based Flowers Foods, Inc.’s announcement that it has bid $390 million for certain brands and assets in the fresh bread category from Hostess Brands, Inc., Irving, Texas.

“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,” Fitch said. “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.”

Fitch said it will assess financing plans, synergies and earnings/cash flow projections if Flowers wins the bids for Hostess’ bread brands. The ratings agency also said it expects Flowers to focus on reducing its leverage within 18 months to 24 months of a transaction closing.

“This potential acquisition dovetails with Flowers’ strategy,” Fitch said. “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.

Fitch noted that although Flowers reached 70% of the population target with its acquisition of Lepage and smaller acquisitions from Grupo Bimbo in 2012, the Hostess acquisition “would cement Flowers’ national footprint in a more cohesive manner.”

Fitch currently has assigned “BBB” ratings to Flowers issuer default rating, revolving credit facility, and term loan A. According to Fitch, “BBB” ratings indicate good credit quality and that expectation of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

The company’s rating outlook is “stable.”
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