Companies Making Bids For a Great Brand

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Thomasville, Georgia-based snack maker Flowers Foods (NYSE: FLO) has entered a formal bid to acquire a host of now-defunct baked-goods manufacturer Hostess Brands' assets and product lines. Although the deal includes bids for such iconic brands as Wonder Bread and Beefcake, it does not include an allowance for Hostess's infamous Twinkies brand. While the $390 million asset purchase appears attractive on its face, it may soon face competition from deep-pocketed Apollo Global Management's (NYSE: APO) own buyout bid. Alternatively, Apollo may simply bid on the Hostess assets that were excluded from the Flowers bid.

About Flowers Foods, Hostess and Apollo Global Management

Flowers Foods is one of the largest American producers and suppliers of baked goods, breads and snack foods. The company sells a tremendous range of food products, including tortillas, buns, pies, pastries, bagels and muffins. Its portfolio consists of over two dozen individual brands purchased from distressed food processors over the course of the past decade. Flowers earns most of its revenue by selling its products directly to supermarkets and department stores. With about 9,500 employees, the company earned $120.6 million on about $3 billion in revenue in 2011.

Flowers Foods competes with other snack food giants like Mondelez (NASDAQ: MDLZ).  Flowers Foods is small in this space with about $2.95 billion in sales, since Mondelez has $54 billion in annual sales; but compared to much of the competition, Flowers Foods is able to really capitalize on the brand names.  Flowers has a return on assets of 7% while Mondelez has a return on assets of 4.9%.

Now facing liquidation, Hostess was once an iconic baked-goods maker that developed and distributed household-name brands like Wonder Bread, Twinkies and Ding Dongs. The company was undone by rising food costs, restrictive labor deals with its union bakers, a cumbersome distribution network, and changing tastes among its increasingly health-conscious consumer base. In the coming months, the company must dispose of over a dozen brands as well as 30 processing plants and 60 distribution centers. At its peak, it employed nearly 18,000 workers.

New York-based Apollo Global Management is a boutique private equity and investment firm that operates primarily in North America and Europe. The company focuses on purchasing distressed assets or companies and taking advantage of special corporate situations. It incorporates many of the alternative-investment assets that it purchases into hedge funds and wealth-preservation vehicles for its deep-pocketed clientele. Apollo has about 625 employees and earned $124.2 million on $2.3 billion in revenue in 2011.

How the Flowers-Hostess Deal is structured

As a bankrupt private company, Hostess has no shareholders to appease. In fact, it has a court-ordered imperative to dispose of its outstanding assets as quickly as possible. It is estimated that the total liquidation of Hostess's brands and equipment could fetch over $1 billion. However, it is unlikely that a single bidder will step forth to subsume the entire company into its corporate ecosystem.

The terms of the Flowers bid involve the all-cash purchase of about 20 processing plants, nearly 40 regional distribution centers, and a smörgåsbord of brands that includes Wonder Bread, Nature's Pride, Merita and Beefsteak. At this time, Flowers has not expressed interest in other popular brands like Twinkies, Ding Dongs and Ho Hos. If it is judged to be the best offer on the table after January 25, it is likely that this deal will close relatively quickly.

However, the Flowers bid faces competition from a partnership between Apollo Global Management and food industry veteran C. Dean Metropoulos. Although nothing is set in stone, a higher Apollo offer for the same assets sought by Flower could complicate Hostess's liquidation process.

At this time, it appears more likely that Apollo and Metropoulos will bid for Twinkies, Ding Dongs and other snack-cake brands without worrying about Wonder Bread and its ilk. This would be ideal for Hostess's bankruptcy trustee as well as the clarity-seeking Flowers shareholders who may be anxious to put the Wonder Bread acquisition in the books.

Potential complications

Aside from the potential for last-minute "stalking horse" bids, the Flowers-Hostess deal faces few potential hang-ups. Since Hostess is currently in liquidation, the company is not in a position of negotiating strength. Further, it appears unlikely that a major bidder will step in to take over the entire company. Although the most likely candidate for such a move would be Mexican snacks giant Grupo Bimbo, that company has already expressed more interest in outbidding Apollo for the rights to Twinkies and Ding Dongs.

Long-term prospects

This deal appears to offer an excellent value for Flowers Foods. Although it is difficult to ascribe a precise fair value to the assets that Flowers stands to purchase, the company may be securing a discount of 40 percent or more on this deal. In addition, the name-recognition of the brands involved suggest that Flowers will have to invest only a minimal amount in the marketing and distribution of its new products.

Investors are keenly aware of this deal's implicit value. Since the late-November announcement that Flowers intended to purchase these brands, the company's stock has risen from $19.45 per share to about $27 per share. This represents an increase of nearly 39 percent during that time.

Since news of the acquisition broke, several analysts have raised their earnings forecasts and price targets for the company. Unlike many mergers, this deal may continue to pay dividends long after its closing. In fact, Flowers's acquisition of Wonder Bread and Beefsteak may put it in a favorable long-term position and make its stock attractive to conservative and aggressive investors alike. With a 2.4 percent dividend and impressive earnings growth, Flowers is a clear buy-and-hold candidate at these levels.

In sum, it appears likely that Flowers Foods will be able to stake its claim to Wonder Bread and several other Hostess brands. In addition, the company will enjoy a sizeable boost to its U.S. processing and distribution infrastructure. After the initial charge related to the acquisition, such an addition to its North American footprint could provide a major ongoing boost to the company's bottom line. Long-term investors who wish to profit from the demise of an American institution would do well to buy into Flowers at these levels.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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