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KIM: How new owners turned Twinkies into solid gold

May 6, 2017

KimWhile Americans rejoiced when Twinkies reappeared on store shelves in the summer of 2013, nobody has had more reason for celebration than Metropoulos & Co. and Apollo Global Management LLC (together “M&A”), which purchased Hostess Brands out of bankruptcy liquidation just months earlier.

The tale of Hostess’ beginning, demise (twice) and rise from the ashes is a fascinating case study of iconic brands, mismanagement and human tragedy and how private equity/buyout firms can make mind-boggling sums in the blink of an eye.

The first Hostess cupcake was created in 1919, and the brand was founded in 1925 when Continental Baking bought Taggart bakery. Twinkies were invented by James Dewar in 1930 as a cheap bakery item during the Depression. Interstate Baking Co. acquired Continental in 1995.

Interstate filed for Chapter 11 bankruptcy protection in 2004. According to The Atlantic, the company was “collapsing under the weight of flagging sales, overly generous union contracts replete with ridiculous work rules and gobs of debt.”

Interstate emerged from bankruptcy in 2009, with new investors providing $490 million in financing and the company’s two major unions, the Teamsters and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union contributing $110 million in annual wage and benefit concessions.

Unlike most Chapter 11s, the renamed Hostess Brands exited bankruptcy with more debt than when it entered. By January 2012, the company was back in Chapter 11, seeking additional capital and more concessions from the unions.

Understandably, the unions were loath to grant further concessions after just three years. Management threatened to cease operations and liquidate if the unions refused to cooperate. Following a bitter strike, Hostess changed its bankruptcy to a Chapter 7 liquidation and 18,500 employees lost their jobs.

In April 2013, M&A purchased the Hostess and Dolly Madison bakeries and brands for $410 million ($186 million of their own cash, plus debt), free and clear of all prior obligations and “legacy” issues (including 350+ separate collective bargaining agreements). The new owners invested $160 million to upgrade and automate baking and packaging.

Key to success was abandoning the Direct Store Delivery model, which used company-owned trucks (on which Wonder Bread and Twinkies weren’t allowed to ride together) and company-employed drivers to serve 5,500 routes, in favor of a Direct-To-Warehouse model, where all shipping is done by third parties to customers’ warehouses. This resulted in distribution costs dropping more than half.

Windfalls to M&A happened in quick succession. Hostess was able to borrow to pay a $905 billion dividend to M&A in July 2015. In November 2016, M&A sold a 58 percent stake in Hostess to Gore Holdings for $725 million (with Hostess becoming a public company again—TWNK). At a recent price of $17, TWNK is valued at $2.2 billion.

From its original investment of $186 million, M&A received the $905 million dividend and $725 million from Gore, and retains TWNK shares worth $924 million (Apollo actually sold the majority of its shares last month), a total of more than $2.5 billion. This equates to a 13-fold return in just four years, a gigantic mountain of sponge-cake gold.•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC. He can be reached at (812) 376-9444 or mickey@kirrmar.com.

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