Hostess Brands, Inc. acquires breakfast brands and expands product range

Hostess Brands, Inc. (“Hostess” or the “Company”) today announced that it is completing the acquisition of certain US breakfast assets of ARYZTA LLC (“ARYZTA”), including one of its Chicago Cloverhill bakery facilities and the Big Texas and Cloverhill brands. In addition to the brands, the acquisition includes supply partnerships with several key retailers of Hostess. Until June 2017, the bakery was a significant co-manufacturer to the Company.

“This is an excellent enabling acquisition for the Hostess breakfast strategy and fills a key strategic gap in our product portfolio,” said Dean Metropoulos, executive chairman of Hostess. “The Big Texas and Cloverhill brands and private label partnerships will add significant strength to our growing breakfast business.”

Highlights of the transaction include the following:

The Big Texas and Cloverhill brands distribution strength provides Hostess greater access to the club, vending, cash and carry and independent convenience stores sales channels; and provides for a strong breakfast partnership with several existing key retailers
Significantly expands the Hostess range of offerings in the Breakfast category of Sweet Baked Goods (“SBG”), including HoneyBuns, Danish Pastries and Cinnamon Rolls, among other offerings. With this acquisition, the Company expects to reduce its reliance on co-manufacturing;
The 137,000 square-foot bakery facility represents the largest individually-wrapped Danish pastry facility in North America;

“This strategic acquisition allows us to bring important product manufacturing in-house as we expand and drive growth in our breakfast product portfolio,” commented Bill Toler, president and chief executive officer of Hostess. “In addition, this purchase will enable Hostess to forgo in-house capital investments and create significant value over the next few years.”

“We have had a long supply relationship with ARYZTA for our breakfast items and are eager to expand our growing breakfast offerings with these capabilities. In addition, the positioning and consumer loyalty to the Big Texas and Cloverhill brands will broaden our participation in a number of distribution outlets,” said Andy Jacobs, chief operating officer of Hostess. “This acquisition will enhance our competitive position as we have the opportunity to further build our branded distribution and market share in the breakfast category within sweet baked goods¹, as well as enhance new and existing retailer relationships, particularly in the complementary club and vending sales channels.”

The acquired assets include inventory, property, plant, equipment and customer relationships serviced by the Chicago Cloverhill bakery facility. The Company expects short-term EBITDA losses of approximately $15 million to $20 million and corresponding earnings per diluted share dilution of approximately $0.10 to $0.12 as a result of anticipated operating losses from the acquired business through the second half of 2018 as the Company improves the sales and operating performance of the facility. The Company expects the acquired business to be EBITDA positive in the first half of 2019. By 2020, the Company expects this business to contribute approximately $20 million to $25 million in EBITDA. The Company will provide a formal outlook for full year 2018 when it reports financial results for the fourth quarter and full year ended December 31, 2017 in late February.

The Company believes this acquisition is an efficient use of cash and continues to have the financial flexibility to consider potential future uses of cash including funding acquisitions, optional debt repayments or opportunistically simplifying its equity structure. Additionally, Hostess expects to immediately depreciate a substantial portion of the purchase price for tax purposes.

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