Higher leverage leads to Flowers’ ratings revision
SAN FRANCISCO — S&P Global Ratings has revised its outlook for Flowers Foods, Inc. to negative from stable following the Thomasville, Ga.-based company’s announcement that it is acquiring Simple Mills.
The ratings agency said the downgrade reflects the possibility Flowers won’t be able to restore leverage below 3x, as well as the potential for execution risks in integrating the Simple Mills’ portfolio due to Flowers’ limited experience in the highly competitive cookie and cracker categories.
Flowers agreed to acquire Simple Mills — a manufacturer of crackers, cookies, bars and baking mixes marketed as better for you — for $795 million in early January. The transaction is expected to close in the first quarter of fiscal 2025.
While acknowledging that the acquisition of Simple Mills will diversify Flowers’ portfolio into faster-growing categories, S&P Global indicated the company may face execution risks.
“It’s the largest acquisition in Flowers’ history,” S&P Global said. “The company expects the addition of Simple Mills will bolster and diversify its product portfolio into adjacent and complementary categories. Following a similar playbook used for several other acquisitions, Flowers sees an opportunity to expand the Simple Mills brand through greater distribution and marketing, as well as accelerating innovation. The Simple Mills brand could also be extended to new snacking categories. We believe the brand will contribute to diversifying Flowers’ legacy portfolio with premium, differentiated, and faster-expanding categories with favorable trends due to the increasing popularity of natural and better-for-you foods and snacks.
“Nonetheless, we acknowledge it could entail some execution risk because Flowers has limited experience in the highly competitive cookie and cracker categories dominated by larger players such as Mondelez, Kellanova, and The Campbell’s Co. These larger competitors outspend Flowers on marketing, distribution, research and development, and mergers and acquisitions. They also have broader and deeper relationships with leading national retailers. The Simple Mills management team will remain following the acquisition, which can help mitigate some execution risk.”
Also contributing to S&P Global’s outlook revision is the possibility Flowers will not be able to restore leverage below 3x. Flowers has indicated it will replace its $795 million bridge term loan financing to fund the acquisition with permanent debt financing in the first quarter. As a result, S&P Global said it expects Flowers’ adjusted pro forma leverage will increase to about 3.5x, which compared with about 2.3x as of Dec. 31, 2024.
“While we believe that Flowers has a solid track record of deleveraging after acquisitions and that management has a strong commitment to credit quality, the use of all-debt financing for a large acquisition could signal a departure from the prudent financial policies that support our ratings,” S&P Global said. “We expect company-defined net leverage of 3.1x to 3.3x, well above Flowers’ target of 1.5x to 2x.”
Still, S&P Global said it expects Flowers will be able to eventually deleverage below 3x in about 24 months after the acquisition of Simple Mills closes.
“We expect Simple Mills to contribute about 5% top-line improvement in 2025,” the ratings agency said. “We also forecast S&P Global Ratings-adjusted EBITDA margin improving to above 12% in 2025, driven by moderating ingredient and packaging cost inflation, higher branded sales mix, and cost savings from productivity initiatives. We estimate the company could deleverage to 2.9x about 24 months after the Simple Mills acquisition closes if forecast operating performance materializes.”
S&P Global said it could revise its outlook to stable if the integration of Simple Mills is successful and it performs as expected, and if Flowers is able to expand profitability through organic growth and cost savings from new enterprise resource planning system and productivity initiatives.