Mood is upbeat over Tasty Baking buyout

With promises that it will start selling Peanut Butter Kandy Kakes and other Tastykakes across the South and keep hundreds employed in Philadelphia, Flowers Foods Inc. lifted spirits Monday at Tasty Baking Co. in the Philadelphia Navy Yard.

The venerable Tasty could have suffered a worse fate.

Flowers, a Thomasville, Ga., bread giant best known for Nature's Own bread and Mrs. Freshley's pies, said it had agreed to pay an estimated $34.3 million, or $4 per share, for cash-strapped Tasty Baking, which skipped a debt payment in January because of production problems at its new $78 million bakery, as well as soaring commodities costs.

Tasty, which used $31 million in public financing to build the new bakery, was given until the end of June to find a buyer or refinance $100 million in bank debt.

Tasty still owes about $25 million to Pennsylvania, including $3 million lent on an emergency basis in January, when unidentified private investors provided an additional $3.5 million. It is not clear whether Flowers will pay off the low-interest state loans or assume payments.

"As far as I can tell, it's good news," Anwar Bigelow, a temporary machine operator at Tasty, said of the sale as he drove away from the new bakery, home to Butterscotch Krimpets and other treats that elicit nostalgic sighs from most every Philadelphian but are no longer as popular as they were a generation ago.

Despite the dietary shifts and heavy competition in the snack universe, analysts said that Flowers, with its geographic reach and strength as an operator, will likely accomplish for the Tastykake brand what has eluded generations of its Philadelphia managers: profitable expansion beyond the Mid-Atlantic.

Flowers, founded more than 90 years ago and through more than 100 acquisitions, has soared to $2.1 billion in sales and now reaches 53 percent of the United States and aims to reach 75 percent of the country by 2016.

Tasty, which is expected to have $210 million in sales next year, can help. Flowers has long wanted to expand its bread business into the Northeast, where brands owned by Bimbo Bakeries USA Inc. in Horsham dominate. If the deal closes as expected before the end of June, Tasty's distribution network has the potential to give Flowers relatively quick access to new markets for breads and rolls.

News of the deal sent Tasty's stock price up $2.36 to $3.97 on Nasdaq. Flowers' shares closed at $28.18, up 52 cents, on the New York Stock Exchange.

Neither company made executives available for interviews Monday, though they released a video showing Tasty chief executive Charles P. Pizzi and Allen L. Shiver, president of Flowers, loading cases of Tastykakes into a replica of a 1912 Model T Ford.

"We're excited that the agreement will extend the distribution of Tastykakes into many new markets," Pizzi said in a statement, in reference to Flowers' nearly 4,000 delivery routes throughout the South and as far west as California.

"Equally important, this merger ensures that Tastykakes will continue to be made by Philadelphians in Philadelphia," said Pizzi, who was hired as Tasty's chief executive officer in 2002 after a career in government and 13 years as CEO of the Philadelphia Chamber of Commerce.

The South Philadelphia bakery employed 315 in March 2010. Altogether, the company employs 740, including those at an Oxford, Chester County, bakery and in separate headquarters at the Navy Yard.

George E. Deese, Flowers Foods' chairman and CEO, said: "Tasty brings a talented, committed team of employees, two highly efficient bakeries, the iconic Tastykake brand, a solid sales base, and an effective distribution system."

One of Tasty's 413 independent distributors - who drive the blue-and-white panel trucks delivering Tastykakes to Wawa convenience stores, Acme supermarkets, and even the smallest corner stores - said he was optimistic.

"With everything we've been through in the last two years, this is good," Bob Paolino, who owns a delivery route that covers Broomall, Newtown Square, and Paoli, said in a telephone interview.

Paolino said he hoped Flowers would put additional products on his truck. "I would love to carry some more stuff on this truck. I would love to carry some stuff that would sell in the summertime," he said.

At the South Philadelphia bakery, which has been plagued with production problems since opening last year, the atmosphere was "pretty good," according to Warren, a forklift driver who has worked at the company for 20 years and would not give his last name.

"We're on our way, hopefully," he said from his car.

Tasty would not allow reporters on company property, making it difficult to get comments.

Another employee who would not give his name said that Gene Lord, a Flowers executive vice president, talked to bakery employees at noon. The most important thing the employee came away with was: "They'll put our product around."

That issue - distribution - is the key to the Tasty Baking story. Pizzi's bet-the-company move from the old plant at 2801 W. Hunting Park Ave. to the new bakery at the Navy Yard did not go smoothly. It is the immediate reason for the sale of the company, three years shy of its 100th anniversary.

But, longer term, in the market for fresh-baked goods with a short shelf life, distribution trumps brand power. The problem for Tasty has long been the cost of expanding distribution. When the company opened Tastykake routes in Pittsburgh in 2003, it took two years to reach the break-even point, putting a strain on the route owners and the company.

Years ago, when there was less competition in the snacking arena, the Tasty company expanded into other businesses, such as graphic design, instead of focusing on expanded distribution.

The new bakery, with cost savings anticipated through production efficiencies, was supposed to provide cash for expanding routes and diversifying its product line. But the savings fell far short of expectations, in part because of soaring costs for flour, sugar, and chocolate that hit at the same time as production problems.

Now, Flowers will pick up the Tastykake legacy.

"I would expect to see the Tastykake brand expand across the country via Flowers' extensive distribution network," said George Latella, a visiting professor of food marketing at St. Joseph's University and a former Tasty Baking sales and marketing executive.

Philip J. Baur Jr., son of a Tasty Baking cofounder and a former chairman, said he was not saddened to see Tasty lose its independence.

"I feel very good," Baur said. "There's no one better I can think of that I'd rather be associated with."

As a shareholder, Baur was not thinking about the higher price the company might have sold for years ago.

"Hindsight is pretty good," he said.