Flowers Foods outlook downgraded to negative due to Simple Mills acquisition: S&P Global

Investing.com -- S&P Global has revised its ratings outlook for U.S.-based Flowers Foods (NYSE:FLO) Inc. from stable to negative, following the announcement of its $795 million acquisition of Simple Mills. The acquisition, set to be funded by permanent debt financing, is expected to close in the first quarter of 2025, subject to regulatory approval.

The revised outlook reflects increased leverage resulting from the acquisition. S&P Global Ratings-adjusted pro forma leverage is expected to rise to about 3.5x, above their 3x threshold for the rating, and a significant increase from the 2.3x recorded for the 12 months ending Dec. 31, 2024. As a result, S&P Global has maintained its ’BBB’ issuer credit rating for Flowers Foods, but warns of a potential downgrade if the company’s adjusted leverage does not improve below 3x within 24 months of the acquisition close.

The Simple Mills acquisition is the largest in Flowers Foods’ history and is intended to diversify the company’s product portfolio into more rapidly growing categories. Simple Mills, a manufacturer and marketer of premium branded better-for-you crackers, cookies, snack bars, and baking mixes, is expected to bolster Flowers Foods’ product range and contribute to diversifying its portfolio with premium, differentiated, and faster-expanding categories.

However, the acquisition presents execution risks, as Flowers Foods has limited experience in the highly competitive cookie and cracker categories, which are dominated by larger players such as Mondelez (NASDAQ:MDLZ), Kellanova, and The Campbell’s Co. These competitors have broader and deeper relationships with leading national retailers and outspend Flowers on marketing, distribution, research and development, and mergers and acquisitions.

Despite these challenges, Flowers Foods is expected to deleverage below 3x within approximately 24 months after the Simple Mills acquisition closes. The company reported flat sales growth in fiscal 2024, with improved price/mix offset by lower volumes, partly due to strategic exits of certain food service businesses and stock-keeping unit rationalization. S&P Global forecasts about 2% organic growth in 2025, with Simple Mills contributing about a 5% top-line improvement.

In addition, Flowers Foods’ free operating cash flow (FOCF) is expected to improve from about $280 million in 2024 to $300 million in 2025, and further to $360 million in 2026. This improvement is expected to be driven by lower working capital and capital expenditure needs, and is expected to support deleveraging.

The negative outlook reflects potential risks to the company’s credit rating if the adjusted leverage does not improve below 3x within 24 months after the transaction close. A downgrade could occur if the Simple Mills integration goes poorly, if profitability declines, or if the company prioritizes acquisitions, dividend increases, or share repurchases over debt repayment. The outlook could be revised to stable if Flowers performs in line with expectations and reduces and sustains adjusted leverage below 3x.

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