Quiroz, Prince discuss Sara Lee deal

by Josh Sosland
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HORSHAM, PA. — The acquisition of the North American Fresh Bakery business by Grupo Bimbo S.A.B. de C.V. will make Bimbo’s U.S. business the Mexico City-based company’s largest as measured by sales, said Guillermo Quiroz, Grupo Bimbo’s chief financial officer.

Mr. Quiroz and Gary Prince, B.B.U. president, spoke with investment analysts Nov. 9 after the merger agreement was announced. The Bimbo executives discussed a range of issues related to the transaction, including regulatory issues, capital expenditure plans and what Mr. Quiroz described as the attractive price to be paid for the business.

At $925 million, the prospective outlay for the Sara Lee baking business equates to 0.5 times 12-month sales and 8.9 times 12-month adjusted earnings before interest, taxes, depreciation and amortization. Accounting for $150 million to $200 million in annual synergies anticipated by 2013, the purchase price would equate to 3.7 times “synergized EBITDA,” Mr. Quiroz said.

Expanding on terms of the acquisition, Mr. Quiroz noted that Bimbo is acquiring the rights to license the Sara Lee brand not only for fresh baked foods, but also certain categories of the refrigerated and frozen baked goods business, excluding frozen desserts. Sara Lee historically has been the leading supplier of refrigerated private label dough products in the United States.

The acquisitions of the Sara Lee business will raise total Bimbo annual sales by 23% and will shift the company’s geographic U.S./Latin American sales mix from about 40-60 to 50-50. While the U.S. currently accounts for 41% of total Bimbo sales, the figure would rise to 52% after the acquisition with 38% in Mexico and 10% in Latin America.

While 31% to 34% of EBITDA currently come from the United States, the figure would rise to 39% after the transaction.

Mr. Quiroz said financing already is in place for the transaction, which will raise total Bimbo debt to $3.2 billion, or about 2.6 times adjusted EBITDA. By contrast, the Weston acquisition in 2009 left Bimbo with debt levels 3.5 times EBITDA.

Responding to an analyst’s question, Mr. Prince discussed potential synergies to be gained by the acquisition, including ways to make the company’s route system more efficient.

“We will take miles off the road,” he said. “We will move products closer to market. We will, for instance, improve throughputs on many bread lines that run at 100 a minute to 160 to 180 a minute. We will double the throughputs. We will lower the costs of the mainstream portfolio significantly.”

Mr. Prince emphasized the importance of efficiency in the “mainstream bakery business” and said much of the coming capital investment will be behind the “soft bread market,” while Bimbo will work to make the “variety bread market more productive.”

“We will build — to give you a rough number, to build a two-line bakery today in the U.S. is going to cost somewhere between $50 million and $60 million,” he said. “And this industry is an old industry. This industry needs reinvestment. And over the long term, it's where the real value creation comes from. And frankly, all constituents will benefit from this investment.

“And whether it’s our consumers, our customers, our shareholders alike, this is a meaningful investment in the baking industry, not just inside B.B.U. I believe that we will make markets like Texas and Florida and California, the Pacific Northwest, the Northeast, much more productive in time. Yes, we will close older facilities. And I believe that bakeries, all bakeries need a purpose. Bakeries need to be world-class at whatever it is they choose to do, whatever products they manufacture.”

Mr. Prince projected annual capital expenditures of $250 million.

Asked a follow-up question on capital expenditure, Mr. Prince said B.B.U. has been spending $100 million per year, half each on new plants and maintenance. He estimated Sara Lee spending at $50 million, entirely devoted to maintenance.

“We are going to allocate about $150 million a year minimum to new technology, and a combined maintenance capital of about $100 million a year. And the $150 million is flexible as we move forward and redefine our priorities.”

Asked about potential regulatory hurdles associated with market overlap between Bimbo and Sara Lee, Mr. Prince acknowledged potential issues.

“There is some overlap,” he said. “…It’s early. Obviously, we’re announcing the deal today. We will start the regulatory process in due course here.”

Reflecting new season’s highs for wheat futures and ingredient prices the day the announcement was made, the Bimbo executives were asked about hedging practices at Bimbo and Sara Lee.

“We’ve embraced a six-month policy here for some time,” Mr. Prince said. “And I think the Sara Lee Fresh Baking business has also had a longer-term view on commodities. They will run their business for the foreseeable future. We will run ours here at B.B.U. while we go through the regulatory process.”

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