Lepage to Join Flowers Foods

Packaged bakery foods company Flowers Foods Inc. (FLO - Snapshot Report) recently inked a definitive agreement to acquire Maine-based Lepage Bakeries, Inc. The deal is valued at $370 million in cash and stock. The transaction awaits necessary regulatory approvals and is expected to be closed during the second quarter of fiscal 2012.

Flowers plans to fund the transaction through cash-on-hand and credit facilities. The deal should benefit Flowers and Lepage alike as both operate in the same vertical.

We view the deal as strategically positive for both parties, given that Lepage Bakeries has been offered a justified valuation for this buyout in our opinion. Also, the deal holds instant cash value to Lepage.

Founded in 1903, Lepage Bakeries manufactures premium-quality breads, rolls and donuts, catering to customers throughout the Northeast U.S. under the Country Kitchen and Barowsky's brands. In fact, Lepage has a strong branded market share. Barowsky's organic brand can also make an entry to Flowers Foods’ current Southern U.S. market.

The deal should extend Flowers' reach to New England and the New York area, adding around 18 million consumers to its present base ands thus facilitating its growth. Not only this, the deal will add three well-organized bakeries, two in Lewiston, Maine, and one in Brattleboro, Vermont.

Once integrated, the Lepage facilities will augment Flower’s direct-store-delivery facility whose accessibility will increase from 64% to 70% of the U.S. population. The expected figure comes closer to Flowers goal of attaining at least 75% by 2016.

Flowers management anticipates the transaction to be accretive by 3-5 cents to its 2012 earnings per share, excluding one-time acquisition costs. For 2013, the merger will inject 8-12 cents to Flowers’ earnings per share. Upon completion of the transaction, Lepage’s employees will join Flowers Foods with senior officials continuing to lead from the front.

Flowers Foods has been active in inorganic expansion. It has made over 100 acquisitions since it got listed publicly in 1968. It has set a long-term goal to grow through acquisitions, making entries into new markets, and trying new product offerings.

Geogia-based Flowers Foods competes with the likes of Corn Products International Inc. (INGR - Snapshot Report). Flowers Foods currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.