THOMASVILLE, GA. — A court decision is expected on Feb. 13 to determine the fate of Flowers Foods, Inc.’s pending acquisition of the Sara Lee and Earthgrain brands in California from Grupo Bimbo S.A.B. de C.V.

The transaction, which would give Flowers Foods perpetual, exclusive and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced bread, buns and rolls in California, a business with annual sales of about $134 million, was approved by the U.S. Department of Justice in October 2012.

Portions of the transaction are scheduled to close by Feb. 23, but recent action to liquidate Hostess Brands, Inc.’s bread businesses — with a significant portion potentially going to Flowers — led Grupo Bimbo to file a motion in the U.S. District Court for the District of Columbia on Jan. 29 requesting a suspension of the transaction.

“The competitive landscape of the United States bread industry has undergone dramatic changes in the past three weeks,” Grupo Bimbo said in the filing, noting that the combination of Hostess, Bimbo’s divestiture assets, and Flowers’ pre-existing assets “would give the buyer dominance in certain types of bread, fundamentally altering competition in the sale of bread in California and nationwide.”

“Because this result would contradict the (modified final judgment’s) instruction that ‘competition (not be) substantially lessened’ due to the divestiture, Bimbo here seeks a temporary suspension of the divestiture to allow the court and the parties to assess whether such divestiture is appropriate,” Grupo Bimbo said.


Flowers no longer a ‘small player’

According to Grupo Bimbo, at the time of the October announcement Flowers was a recent entrant and small player in the bread business in California, and the acquisition of the California Sara Lee bread assets raised no competitive concerns. But that status changed on Jan. 11 when Flowers was selected as the stalking horse bidder for the majority of the assets related to Hostess’ bread business, including the Wonder, Home Pride, Merita, Butternut and Nature’s Pride brands. Under the agreement, Flowers would pay $355 million in cash (up to $360 million if certain license rights are included in the sale), for the brands, 20 baking plants, 38 depots and other assets. Among the facilities to be acquired, Flowers would net a baking plant in Sacramento, Calif., and two depots in California. Other nearby facilities include baking plants in Henderson, Nev.; Ogden, Utah; and Denver, as well as three depots in Colorado and one in Nevada.

“Flowers’ acquisition of both the Hostess and Sara Lee (California) assets would give Flowers sole control over the three most significant brands in California for ‘traditional’ breads — the sliced bread used for sandwiches and often preferred by families with young children,” Grupo Bimbo noted in the filing.


Bimbo cites original D.O.J. concerns

Grupo Bimbo agreed to acquire the fresh bakery business of Sara Lee in November 2010, and in October 2011 reached an agreement with the Department of Justice under which the company would divest certain brands and related assets and routes in specified markets. Grupo Bimbo’s agreement with the D.O.J. required the divestiture of the Sara Lee and EarthGrains brands in California and smaller brands in the Harrisburg/Scranton region of Pennsylvania and the Kansas City, Oklahoma City and Omaha metropolitan areas.

According to the D.O.J.’s complaint, B.B.U. and Sara Lee are the largest baking companies in the San Diego, Los Angeles, Sacramento and Harrisburg/Scranton areas. In the San Francisco area, B.B.U. is the largest seller of sliced bread and Sara Lee is the third largest.

But Grupo Bimbo noted in its filing that the combination of Flowers with Hostess and Sara Lee would result in Flowers having “dominant relative sales in California — 60% for traditional white bread and 64% for traditional wheat bread.” If both the Hostess and Sara Lee sales were to go through, Grupo Bimbo said Flowers would control 87% of sliced white bread sales in San Francisco, 70% in San Diego, 63% in Sacramento, and 54% in Los Angeles. Meanwhile, the company would have 69% of sliced wheat bread sales in San Diego, 67% in Los Angeles, 65% in Sacramento, and 57% in San Francisco.


Potential problems with promotions

Another complaint raised in the motion was the possibility that Flowers would favor the Hostess and Nature’s Own brands at the expense of the Sara Lee brand.

“In addition to substantially impairing head-to-head competition in traditional sliced bread in California, Flowers’ control of Hostess and Nature’s Own, together with Sara Lee (California), would pose a dangerous risk to the viability of Sara Lee as a national competitor in the traditional category,” Grupo Bimbo said. “In short, Flowers would have a powerful incentive to favor the national brands it would own in full, Wonder and Home Pride, as well as its rising Nature’s Own brand, at the expense of the Sara Lee national brand that it licenses solely in California.”

If Flowers controls all the major traditional brands, it would not have an incentive to participate in Bimbo/Sara Lee national or regional promotions against its own Hostess brands, Grupo Bimbo said. Additionally, attempting to secure Flowers’ participation in such national promotions would disclose Bimbo’s competitive strategy, the company said.

“If Bimbo does not have the ability to offer a true nationwide or regional promotion for Sara Lee — because Flowers declines to participate or prices uncompetitively — Bimbo will be substantially impaired in its ability to compete against Hostess on the national and regional levels,” Grupo Bimbo said. “National and regional grocery chains are relentlessly seeking to maximize efficiencies, and that trend will only continue.”

Grupo Bimbo said it is seeking the expedited briefing schedule because the Sara Lee assets in California will begin transferring to Flowers “in a matter of a few short weeks,” and the company must begin preparing for the divestiture almost immediately.

“After the first week of February it will be difficult, if not impossible, to undo these actions without significant customer disruption,” Grupo Bimbo said. “An order temporarily suspending the divestiture will preserve the status quo and cause no material harm. Any inconvenience to Flowers is a result of its own actions and its failure to inform Bimbo, D.O.J., and the Court of its intentions to acquire the Hostess bread business.”

In a Feb. 7 conference call to discuss fiscal 2012 results, George E. Deese, chairman and chief executive officer of Flowers, said only that the Sara Lee transaction “is scheduled to be completed later this month, followed by a staged roll-out of the acquired brands in California.”

“On Jan. 29, Bimbo filed a motion with the court seeking to temporarily suspend the transaction,” Mr. Deese said. “The hearing on this matter is set for Feb. 13. Beyond that, we cannot comment.”