TSTY Tasty Baking Company (MM)

Packaged bakery foods company Flowers Foods Inc. (FLO) recently announced a definitive agreement to acquire Tasty Baking Co. (TSTY) for $4 per share or $165 million in cash. The transaction includes the existing debts of Tasty. Both companies' boards have unanimously approved the agreement.

Flowers plans to finance the transaction through cash-on-hand and credit facilities. The transaction is expected to close during the second quarter of 2011.              

Pennsylvania-based Tasty Baking Company, together with its subsidiaries, manufactures, co-packages and sells sweet baked goods. The deal should benefit Flowers and Tasty alike as both operate in the same vertical. The deal holds immediate cash value for shareholders of Tasty, at a premium over the current trading value.

On the other hand, it should strengthen Flowers' snack cake business, facilitating its growth. Consequently, we expect both companies to derive synergies from the deal.

Tasty Baking Company sells its products principally through independent sales distributors to approximately 16,000 retail outlets. Hence, the merger will widen Flower’s footprint adding more than 24 million consumers to its present base.

Simultaneously, Flowers Foods will spread the Tasty brand to its current market and provide new opportunities for Tastykake's independent sales distributors. Flowers Foods’ existing territories have access to 53% of the U.S. population.

Flower management anticipates the transaction to be neutral to slightly accretive to its 2011 earnings per share, excluding one-time transaction costs. Additionally, the deal will contribute $115–$125 million to Flowers' 2011 sales and $10–$12 million to its EBITDA. For 2012, the merger will inject $210–$225 million to Flowers' 2012 sales, $25–$30 million to EBITDA and 6–9 cents to earnings per share.

Upon completion of the transaction, Tasty will become part of Flowers' direct-store-delivery segment. Its employees will also join Flowers Foods.

We share our opinion with Flower management that this deal is strategically positive. Flowers Foods has been active in inorganic expansion. It has made over 100 acquisitions since being listed publicly in 1968.

Geogia-based Flowers Foods competes mainly with Corn Products International Inc. (CPO). Flowers Foods Consulting 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.

 
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TASTY BAKING (TSTY): Free Stock Analysis Report
 
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