The bankruptcy auction process currently under way for Hostess' various brands got a boost January 11 with the news that Flowers Foods (NYSE:FLO) made a stalking-horse bid of $390 million for six of its larger bread brands, including the 92-year-old Wonder Bread. While Flowers Foods might not ultimately win the bidding process, it's definitely put its best foot forward. I'll look at what it means to the company, win or lose.
A Winning Bid
Let's assume that Flowers Foods wins the bid for Hostess' Wonder, Nature's Pride, Merita, Home Pride, Butternut and Beefsteak brands. It gains $1 billion in annual revenue produced in 20 plants across the country. Flowers Foods primarily operates in the southern United States, so the $390 million acquisition wouldn't just give it additional revenue. It would provide national distribution, critical to any business looking to grow.
CEO George Deese had this to say about the potential deal: "We believe these assets would enhance our ability, over time, to provide more U.S. consumers quality baked foods at a good value through existing and new retail and food service customers." Flowers Foods expects that if it's able to acquire the six brands at the current bid price, it will immediately be a money maker.
SEE: Mergers And Acquisitions: Introduction
Flowers' Current Business
In business since 1919, Flowers Foods' 44 bakeries generated approximately $2.8 billion in revenue during 2011. For full year 2012, the company expects revenues to increase 7-9% year-over-year with adjusted earnings per share of 96 cents. Its Nature's Own brand is the No.1-selling loaf bread in the U.S. While it's not growing like it once did, it's still managing to move the needle in the right direction. Twelve years ago Flowers Foods competed with seven other large-scale bakeries. Regardless of whether it is successful in its bid, the number of competitors it faces is down to three companies: Pepperidge Farm, part of Campbell Soup (NYSE:CPB); Grupo Bimbo (OTC:GRBMF); and Hostess Brands. Those four companies combine to control 57.4% of the U.S. market for fresh-baked goods. Grupo Bimbo is by far the biggest player at 32.7%, having acquired both Sara Lee and George Weston's U.S. bakery business in the last three years.
Flowers Foods hasn't exactly been sitting still. Its 10 acquisitions since 2004 have added $737 million to the firm's revenue. One of those acquisitions was its May 2011 purchase of Tastykake for $172 million including the assumption of $131 million in debt. The move makes it unnecessary to bid for Hostess' cakes business, which will probably fetch a larger number. Tastykake generated $127 million in revenue and $3 million in operating profits in the seven months it was included on Flowers Foods' 2011 financial statements.
Annualized, that's over $217 million in revenue. Most importantly, with all the acquisitions going on it still managed to generate average annual free cash flow of $112 million between 2007 and 2011. Its business is on solid footing; the best indication of that would be the fact its stock closed trading January 11 less than 5% from its all-time high of $26.10.
SEE: How To Save Money At The Grocery Store
A Losing Bid
As the Rolling Stones once said, "You can't always get what you want." While its management seems pretty opportunistic, I'm sure it also realizes that the M&A game doesn't always go your way. To get out in front of this one, it agreed to be the "stalking horse" bidder that sets the table for Hostess. There are plenty of interested parties including Walmart (NYSE:WMT), which is a big customer of Flowers Foods. A higher bid by the retail giant could jeopardize Flowers' relationship in Bentonville. While it's a risky move to take the lead in such a popular auction, Flowers is doing so to flush out the imposters. If it doesn't work out, Flowers gets a $13.7 million breakup fee for its troubles.
The Bottom Line
Just as Flowers Foods saved Tastykake's business in 2011, it's now looking to save Wonder Bread so it can take the brand into its second century in business. While it's too early to tell if Flowers will be successful, I can't think of a better custodian of the brand. The last thing Wonder needs is another private equity owner. They've been nothing but bad news.
At the time of writing, Will Ashworth did not own shares in any company mentioned in this article.