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December 12, 2008

Bimbo takes slice of US bakery market

Grupo Bimbo has hailed its acquisition of George Weston's US bakery business as a transformational deal that will help the Mexican-facing baker build its credentials as an international player. However, concerns linger over the high levels of debt the company has taken on to fund the US$2.5bn deal. Dean Best reports.

By Dean Best

Grupo Bimbo has hailed its acquisition of George Weston’s US bakery business as a transformational deal that will help the Mexican-facing baker build its credentials as an international player. However, concerns linger over the high levels of debt the company has taken on to fund the US$2.5bn deal. Dean Best reports.

“This is the most important step Grupo Bimbo has taken in its history.”

Daniel Servitje, CEO of the Mexico-based baking giant, this week hailed his company’s move for the US fresh bakery business of Canadian food group George Weston.

Such proud proclamations in the wake of a large takeover are nothing new, of course, but amid all the doom and gloom on the economic landscape, Servitje’s upbeat tone was like a breath of fresh air.

Bimbo is already one of the world’s largest bakers, with operations in North America, Latin America and Asia-Pacific. However, Bimbo’s US$2.5bn acquisition of the Weston business could, according to Servitje, propel the company to the top of the bakery league, taking it ahead of the likes of Kraft Foods, Yamazaki baking Co. and Sara Lee in terms of annual sales.

However, it is in the US where Bimbo and Servitje sees the most immediate benefits. The US is Bimbo’s most important market outside Mexico but, prior to the Weston deal, the company was still generating almost two-thirds of its revenue and 85% of its annual EBITDA from its home market. Just over a fifth of Bimbo’s group sales and 5% of its EBITDA were coming from the US.

For Servitje, the acquisition will “transform” the Bimbo’s business in the US. “The combination of Grupo Bimbo with WFI will create one of the leading bakers in the US with a true national footprint,” he said.

Until now, Bimbo Bakeries USA has concentrated on the western part of the US, where it has grown to become the number one baked goods company in the region. In 2002, Bimbo struck its first deal with Weston, buying the Canadian groups’ bakery assets in the western part of the US for $610m.

Before this week’s agreement, BBU had 13 plants in the US, with sales estimated to reach $1.6bn this year. According to IRI stats cited by Bimbo, BBU has a 27% share of the bread category in the western part of the US, just behind private-label products which account for 28% of sales.

Bimbo’s second raid on Weston’s bakery assets will leave the Mexicans with 35 plants in the US and a roster of brands including Brownberry bread and Thomas’ muffins and bagels. BBU’s annual sales will grow to $3.8bn on a pro-forma basis, meaning Bimbo will depend less on its domestic market.  Mexico will account for 50% of revenue amd 65% of EBITDA in the wake of this latest agreement; the US will generate 40% of Bimbo’s sales and 28% of its EBITDA.

However, while Bimbo’s management seems to think the Weston deal is the greatest thing since sliced bread, some industry watchers were less certain of the acquisition’s impact on the business. Jose Yordan, an analyst at Deutsche Bank, acknowledged that the deal would reduce Bimbo’s dependence on Mexico but said the acquisition would add “little value” to Bimbo’s shares, given “limited” synergies, and the fact that the deal was financed by debt.

“Our first impression is that the deal is neutral at best in terms of potential value creation, given the high price tag,” Yordan wrote in a note to clients.

Concerns over the way Bimbo financed the deal hit its share price on the day the acquisition was announced. Bimbo shares fell by more than 3% after the company revealed it had taken on $2.3bn of debt from a group of six banks, a move that could be seen as risky in the current financial climate.

Bimbo’s debt will climb from 1.2 times its EBITDA to 3.1 times the enlarged company’s pro forma EBITA but CFO Guillermo Quiroz insisted the potential benefits of the deal outweighed those risks. “We understand that this is a higher level [of debt] than we are used to or are comfortable with but we also think that this opportunity and transaction is one we want to do and this financial stress is worth it.”

Weston, on the other hand, is almost flush with cash. The deal with Bimbo comes just weeks after it sold its Neilson Dairy unit to Canadian dairy group Saputo for C$465m (US$373.7m). Speculation over what Weston wants to do with the proceeds form the two disposals is growing, with a possible privatisation of Canadian retail Loblaw – in which Weston owns a 61% stake – touted a as a likely outcome.

Weston, unsurprisingly is keeping its cards close to its chest, although it has indicated it would look to get the cheque book out.

“Having sold both the dairy business and the US fresh baking business at good multiples, we will sit at George Weston with strategically well-positioned companies with leading market positions in food retail and baking in Canada and a significant sum of cash,” said the company’s executive chairman Galen Weston this week. “We intend to use that cash wisely and at the appropriate time.”

David Hartley, an analyst at BMO Capital Markets in Canada, said he believes a privatisation of Loblaw may be a “viable option down the road” but that Weston is likely to keep its powder dry in the short term.

“We are less inclined to believe that the sale of Weston’s US bakery assets will lead to the near-term privatisation of Loblaw,” Hartley wrote in a note to clients. “We believe that Weston’s management team would be prudent to sit on some of the cash proceeds from the sale given the uncertainty in the economy and the credit markets.”

Hartley also asserted that, in the longer term, the privatisation of Loblaw seems unlikely, given the issues that still surround the business and the opportunity for Weston to buy “under-appreciated assets” in the current economic climate.

Loblaw, he said, may need more and more investment as competition in Canada’s food retail sector heats up. “We believe that Loblaw is catching up on years of underinvestment in its store network, systems and operations support. Thus, the potential need for stepped-up levels of investment in an increasingly competitive environment may be under-appreciated by many,” Hartley wrote.

“Loblaw’s capex as a percentage of sales was 2.1% in 2007 and is expected to be 2.3% in 2008; both are below the traditional 3% rule of thumb level desired in the grocery industry to maintain an up-to-date network of stores, technology and so on.”

As we head into 2009, there is much, then, for the executives at Bimbo and Weston to chew on.

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