Tasty Baking: Determining the Acquisition Value of a Struggling Bakery

| About: Flowers Foods, (FLO)

Tasty Baking (TSTY) has bounced back up quite a bit since it reached a 52-week low of $1.50 on March 30. In fact, it has gone up 33% since those lows to $1.98. Quite a bounce on no news, and I assume some TSTY longs are optimistic that a potential suitor will take over.

Upon letting it slide on its principal payments in January, Tasty Baking’s creditors gave the company an ultimatum: Either restructure your debt and get us paid off, or sell the company by June 30. As Tasty is currently searching for a buyer, I decided to do some research to see how much bakeries tend to go for in an acquisition, and found seven case studies to look at.

  1. The largest Mexican food company, Grupo Bimbo (OTCPK:GRBMF), is currently in the process of buying Sara Lee Corp.’s (SLE) North American Fresh Bakery assets for $959 million, including debt. Sara Lee North American Fresh Bakery had sales of $2.1 billion. It has been pretty much a break-even business and had a negative EBITDA of $1 million last year.
  2. Flowers foods (NYSE:FLO) bought Royal Cake out of Chapter 11 bankruptcy in 2005 for about $10 million. Royal Cake’s 2004 annual sales was $24 million.
  3. Kellogg (NYSE:K) bought Navigable Foods, a manufacturer of cookies and crackers in China, for $33 million in 2008, which doesn’t include a $6 million non-controlling interest. Navigable Foods had $50 million in sales in 2007.
  4. In 2010, CSM bought bakery supplier Best Brands for $510M. Best Brands' 2009 sales totaled $538M and EBITDA was $60M.
  5. Aryzta, a Switzerland specialty bakery group, bought Fresh Start Bakeries and Great Kitchens in 2010 for $1.08B. Their combined revenue in 2009 was $1.03B with an EBITDA of $133M.
  6. Vivartia, Greece’s largest food production company, bought Nonni for $320M in 2008. Nonni had sales of $187M and EBITDA of $32M in 2007.
  7. Lion Capital bought Bumble Bee Foods for $980M in 2010. Bumble Bee Foods reported $940M sales in 2009. 2009 EBITDA was around $100M.

Looking at each acquisition, a pattern emerges. Those companies that struggled with earnings are bought for less than their previous year’s total net revenue. In the case of Sara Lee North American Fresh Bakery, it was acquired for about half of net revenue.

Those companies that are cash cows with high EBITDAs like Nonni, Fresh Start Bakeries, and Bumble Bee Foods, are bought out for more than the previous year’s net revenue.

Keeping in mind the metrics of this pattern, let’s look at Tasty Baking’s numbers:

  • Total debt, as of Sept. 25, 2010: $169.7M.
  • Extra debt, as of March 25: $6.5M (short term debt added) + $3.4M (deferred rental expense) = $9.9M.
  • Current total debt = $169.7M + $9.9M = $179.6M. (By June 2011, TSTY will have more debt than this, but for this metric, rounding to $180M will suffice.)
  • Total 2010 net sales: $171M.

EBITDA = Net Sales - Cost of sales (excluding Depreciation) - SG&A (in thousands)

2010 EBITDA:
Q1: 43,135 - 30,058 - 12,914 = 163.
Q2: 43,527 - 32,237 - 12,018 = -728.
Q3: 40,370 - 29,883 - 13,140 = -2,653.
Q4: 43,135 - 30,058 -12,914 = 163 (since I don’t know exact numbers for Q4 2010 yet -- sales were about $43M -- I'm using the numbers from Q1).
TSTY 2010 EBITDA = -$3.06M.
Tasty Baking currently has $180M in debt. In a bankruptcy court, common shareholders are last in line, so the company would have to be purchased for over $180M for the shareholders to get anything. Tasty Baking had 2010 net sales of $171M and 2010 EBITDA of -$3.06M.
I have found zero cases of a bakery with a negative EBITDA the previous year being purchased for greater than its previous year's net sales. Often, even if EBITDA is positive -- like in the examples I showed -- the company is still bought for less than the previous year's annual revenues. If Tasty Baking can't sell itself for over $171M, not only will the shareholders be left holding the bag, but many creditors will be too.
Disclosure: I am short TSTY.