Pinheiro sees Flowers as winner in Bimbo sales

by Josh Sosland
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PHILADELPHIA — Flowers Foods, Inc. plans to expand its geographic presence significantly in the years ahead likely will be bolstered by divestitures required of Grupo Bimbo S.A.B. de C.V., said Mitchell B. Pinheiro, an analyst with Janney Montgomery Scott.

In an Oct. 25 research update on Flowers, Mr. Pinheiro said Flowers is “a likely acquirer of Grupo Bimbo/Sara Lee brand/asset divestitures.”

On Oct. 21, the U.S. Department of Justice said it reached an agreement with Grupo Bimbo S.A.B. de C.V. and Sara Lee Corp. under which Bimbo will be able to purchase the North American Fresh Bakery business of Sara Lee. As part of a consent agreement, Bimbo will be required to sell assets in four California markets plus Kansas City, Omaha, Oklahoma City and the Harrisburg/Scranton area of Pennsylvania.

“The announcement last week that Grupo Bimbo and Sara Lee reached a settlement with the U.S. Department of Justice to allow for completion of the sale of Sara Lee’s North American Fresh Bakery business to Grupo Bimbo (expected to close Nov. 5) sets the stage for the next step in bread consolidation,” Mr. Pinheiro said. “The markets requiring asset and bread brand divestitures fit nicely into Flowers’ geographic growth markets, and we believe Flowers would be the likely acquirer.”

In March, Flowers announced plans to expand its fresh baked geographic footprint to reach 75% of the U.S. population by 2016. At the time of the announcement, the company’s penetration was estimated at 50%.

Mr. Pinheiro said the assets to be divested generate $155 million in annual bread sales and all are located in “key growth areas” for Flowers.

“We believe these assets will fetch $80 million to $120 million (0.5-0.8x sales),” said Mr. Pinheiro, who has a “buy” recommendation for Flowers.

“The intermediate and longer-term outlook has never been better for Flowers,” he continued. “With increased visibility into the bread consolidation opportunity, strong Tastykake accretion (estimated to contribute ~$0.10/share to 2012 earnings per share), and expectations for an improved core bread business in 2012 (volume recovery following price increases, share gains in Mid-Atlantic and West coast territories, margin tailwind on lower wheat), we believe the rather modest P/E premium (+8%) represents an attractive entry point into the stock.”

Enumerating settlement details relevant to Flowers, Mr. Pinheiro said the consent decree offers a glimpse into the brands and markets in question.

“While the settlement included no big surprises, it does provide increased transparency as to what exactly is available (and where),” Mr. Pinheiro said. “The ‘what’ are solid brands (EarthGrains, Mrs Baird’s, Healthy Choice, Holsum, and Milano), and more importantly, assets which could provide scale efficiencies; the ‘where’ are key growth territories for FLO (southern California, Midwest, Mid-Atlantic).”

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