TEXT - Fitch comments on Flowers Foods Inc
Jan 14 - 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 further. Fitch currently rates Flowers as follows: --Issuer Default Rating (IDR) 'BBB'; --Revolving Credit Facility 'BBB'; --Term Loan A 'BBB'. The Rating Outlook is Stable.