Investing.com -- Fitch Ratings has lowered the rating of Flowers Foods (NYSE:FLO), Inc. to ’BBB-’ from ’BBB’ following the company’s announcement that it will proceed with 100% debt financing for its acquisition of Simple Mills. The Rating Outlook remains Stable.
Flowers Foods, a baked goods producer, has signed a definitive agreement to buy Simple Mills, a player in the ’better-for-you’ snacking category, for a total of $795 million. The acquisition is expected to be finalized in the first quarter of 2025. The downgrade to ’BBB-’ reflects an increase in the company’s pro forma EBITDA leverage to around 3x following the acquisition, up from the high-1x area at the end of 2024.
On Feb. 5, 2025, the company initiated a new five-year $500 million revolving credit facility to replace its previous $500 million revolver that was set to mature in July 2026. Fitch has assigned a ’BBB-’ rating to the new revolving facility and withdrew the ratings on the previous one.
The acquisition of Simple Mills, which is notably larger than Flowers Foods’ past acquisitions, is expected to result in a higher leverage profile over the medium term. Fitch anticipates EBITDA leverage to trend to the high-2x range over the next 12-24 months, reflecting stable EBITDA growth and moderate debt repayment.
Fitch expects the company to generate moderately positive Free Cash Flow (FCF) in 2025 and beyond, as stable cash flows from the base business and incremental cash flow generation from Simple Mills are offset by higher interest expense and other business investments. The company’s ability to reduce leverage significantly is expected to be limited over the next 12-24 months due to its moderate FCF generation.
The Simple Mills acquisition will add cookies, crackers, snack bars and baking mixes to Flowers’ predominantly bread-focused portfolio, resulting in increased scale and diversification. The 2024 pro forma revenue is expected to exceed $5.3 billion, with Simple Mills contributing around $240 million to the top line.
Flowers Foods’ ratings are one notch lower than its direct competitor Grupo Bimbo, S.A.B. de C.V. (Bimbo; BBB+/Stable). Bimbo’s ratings incorporate its solid position as a global leading producer of baked goods that leverages an extensive distribution network, with operations in Mexico, the U.S., Canada, Latin America, Europe, Asia and Africa. This reflects much greater geographical diversification than Flowers.
As of Dec. 28, 2024, Flowers had $5.0 million in cash, $489.4 million available on its $500 million revolver, and $75 million available under its $200 million accounts receivable (A/R) facility. The company’s upcoming debt maturities include its $200 million A/R repurchase facility expiring April 2026, its new $500 million revolver maturing February 2030, as well as $400 million and $500 million of senior unsecured notes due October 2026 and March 2031, respectively.
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