Flowers Industries Case Summary
Flowers Industries Incorporated is a fortune 500 company, headquartered in Thomasville, Georgia. They produce a variety of branded baked foods, snacks, and convenience foods. The company philosophy says “we don’t want to be the biggest food company; we simply want to be the most profitable.” This goal shows that the company is incentive is to please investors rather than focus on customer service.
In March 1985, Marty Wood, the senior VP and CFO is faced with an important opportunity. He believes that changes in the food industry will yield significant opportunities for Flowers Industry. As such, he wants to raise $50 million dollars for investment capital. The purpose of the case is to debate which method of raising the money is best. The options are long term securities, common stock, straight debt issue, and convertible subordinated debentures. He seeks information from bankers and analysts, but eventually has to make a decision himself.
The company’s investment bankers, from Merrill Lynch, proposed a 20 year bond with an interest rate of 8.25% and a maturity in 2005. However, Mr. Wood believed that this structure was not any better than the others being considered. He realizes that investment bankers usually look at premiums and paybacks which make the structure more costly. In addition, in 1985, the bond market showed weakness triggered by selling in the stock market. Interest rates were rising as a consequent result.
In the end, Mr. Wood thought it would be best to introduce a convertible bond as a package with straight debt plus call options in order to set a bounding value. It is similar to a bond and a warrant package and so could be valued as a straight bond plus call option on common stock. This reduces the risk of the security, but at the price of the option. In addition, he has to pay high interest rates in the 8% region for the bonds. Given the risk and high payment of this plan, I don’t think