TEXT - Fitch comments on Flowers Foods Inc

Mon Jan 14, 2013 11:16am EST

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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.
FILED UNDER:
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