Bread is one of the oldest prepared foods in history. Since it was first “sliced” in 1928, bread has become
a staple household product, enjoying
almost perfectly inelastic demand and
near-complete market penetration.
Flowers Foods, the second-largest baker
in the country, estimates that household
penetration in the United States is a
staggering 99 percent. The U.S. fresh
baked goods market has experienced a
long and sustained period of growth and
prosperity, benefiting from urbanization
trends, a shift away from local artisan
breads, and overall population growth.
As workout professionals know, rapid
change and distress in the top tiers
of an industry inevitably reverberate
more broadly down through the supply
chain. However, unlike other (
capital-intensive) seasoned industries, such
as automotive, aviation, and heavy
manufacturing, the commercial
bakery industry is comparatively
inexperienced in dealing with the
challenges of a distressed supply base.
At the end of 2011 and leading into
January of 2012, the company made
several requests for over-advance
funding from its secured lender.
Initial accommodations made by the
lender were quickly exhausted. After
delivery of the 2013 forecast in January,
the lender engaged a turnaround
advisor to assess the situation.
However, even the mature $30 billion
a year fresh baked goods industry is
subject to change and tumult. Starting
with the introduction of the Atkins
diet in the 1990s, changing eating
patterns began to break down demand
for traditional products. Increasing
competition within the industry, along
with increasing costs, drove large
wholesale bakeries to refocus on new
product innovation, streamlining
their operations, and competing
aggressively for retailer shelf space.
As a prescient example of an
industry being caught off guard, the
following case from 2012 poignantly
demonstrates the need for customers,
lenders, and investors to identify
industry cycle risks and remain
vigilant to anticipate hazards that can
result from major industry events.
Turkington USA LLC, a manufacturer
of integrated baking equipment, was a
spin-off from a large food processing
equipment company. As one of three
primary suppliers of baking systems in
the U.S. market, Turkington had long-standing relationships with almost
all of the large commercial bakeries
in the North American market.
The advisor quickly realized the
precariousness of Turkington’s
financial position and concluded that
incremental funding would neither
create any meaningful new collateral
nor fix the overall financial situation.
The advisor determined that the best
course of action, given the company’s
brand name, intellectual property,
customer relationships, installed
equipment base, and overall engineering
expertise, would be an expedited sale
of the business. While liquidation of
the available collateral was a strong
and real possibility, there was potential
enterprise value in the company.
Over time, this competition pushed
smaller competitors out of the market.
With more market share and efficiencies
in existing operations in place, wholesale
bakeries began looking for strategic
synergies. Beginning with the entry
of Mexico’s Grupo Bimbo into the U.S.
market in 1996, the large players in the
industry began to consolidate rapidly, a
hallmark step in the industry maturation
process. Of the eight largest commercial
bakeries in 2000—Best Foods, Earth
Grains, IBC/Hostess, Flowers Foods,
Grupo Bimbo, Sara Lee, Weston, and
Pepperidge Farm—only Bimbo, Flowers,
IBC/Hostess, and Pepperidge Farm were
still independent as of the end of 2012.
For a long time, Turkington benefited
from the buildup of production
capabilities in North America, as well
as the modernization of production
facilities and processes. Turkington’s
large installed base of baking
equipment also provided residual
spare parts revenue, which nicely
supplemented large new order flow.
In February 2012 the company was
put into a state receivership. The
organization was maintained through
short-term funding from the secured
lender, primarily for payroll and other
idle operating costs, so that an expedited
marketing and sale process could
be undertaken before any enterprise
value evaporated. Within just a few
weeks, the receiver was able to stoke
a competitive bidding process and
effectuate a sale of Turkington’s assets
to a large diversified food processing
equipment manufacturer, which
subsequently absorbed “NewCo” into its
portfolio as a stand-alone operation.
With its purchase of Weston in 2009,
Bimbo Bakeries USA, the U.S. subsidiary
of Grupo Bimbo, became the largest
bakery company in the United States.
In November 2011 Bimbo acquired
Sara Lee, then the third-largest bakery
company, in a blockbuster acquisition.
Most recently, IBC/Hostess announced
that it was unable to reorganize and
is in the process of liquidating. It
currently is attempting to sell the
majority of its assets to Flower Foods
and a lesser portion to Bimbo.
That revenue stream didn’t last forever.
Consolidations in the company’s
customer base in recent years
began to slow the pace of inbound
orders as the large bakeries looked
to evaluate and rationalize their
production capacity. The Bimbo-Sara
Lee acquisition in particular—which
involved two of Turkington’s largest
customers—resulted in delays to in-process orders and a slowdown in new
orders as the two bakeries stepped
back to assess their new combined
footprint and future capital needs.
Although the final outcome
maximized value and preserved
almost 90 jobs, the loss of capital by
the constituents was substantial. The
senior creditor was impaired, which
left the mezzanine lender, unsecured
creditors (including customers), and
shareholders without any recovery.
Further, the financial impact on
customers was much larger than the
amount of their unsecured advances.
By the end of 2011, Turkington
already faced a liquidity crunch,
and its financial position further
eroded as a result of the bankruptcy
filing of Hostess in January 2012.
Recipe for Ruin
The following issues, while not
necessarily the causes of Turkington’s