By Soma Biswas
Hostess’ bankruptcy caught nationwide attention in 2013 as the potential demise of the iconic Twinkie brand loomed large, stoking nostalgia among generations who grew up with the packaged snacks. But just over a year after an investor group rescued Hostess from an unceremonious death, the new owners could be on the brink of turning a sweet profit.
Hostess owners Apollo Management and Dean Metropoulos & Co were able to cherry-pick the most valuable parts of the company – brands like Twinkies, Ho-Hos and Ding-Dongs – as it lay on the verge of liquidation. Now, those brands have staged an earnings turnaround, and the private equity owners in recent months held talks with banks including Rothschild and Credit Suisse about exploring a sale, sources said.
The new owners paid $410 million for the brands in March 2013, taking on the risk of re-starting production after failed union talks forced a shutdown. Still, the sale price itself was modest given expectations at the time that the new company would generate $105 million in 2014 EBITDA.
Fast-forward to present day and the reorganized Hostess has blown the initial post-bankruptcy earnings projections out of the water, and plans to market itself during the auction on $175 million in pro forma 2014 EBITDA, said sources following the situation.
Based on the updated figures, Hostess could now easily be worth 7x-10x, or $1.225 billion-$1.75 billion. That compares to the paltry 3.9x bankruptcy sale multiple – an unheard of valuation for a well-known national consumer brand with decades of history. In contrast, the going price for big branded food companies is typically at least 7x-8x, though many reap even higher multiples.
Considering Hostess now only has $300 million in debt on its balance sheet, the private equity firms stand to walk away with at least $925 million – a nearly four-fold return on the $250 million in cash they initially contributed.
Apollo and Metropoulos know they’ve been sitting on big profits and have been impatient to get their money out. The sponsors tried to take a $175 million dividend over the summer, but backed off after Hostess’ lenders refused to grant permission, sources told Debtwire at the time.
Impressive earnings aside, a Hostess sale is not going to be a cake walk. For one thing, bidders will want assurances that the owners haven’t sacrificed quality for the bottom line. News reports surfaced mid-year that the new Hostess had taken to freezing its snacks, instead of getting them on shelves within 48 hours of baking.
Perhaps the move is meant to accommodate the new distribution system that has shed the company’s old truck fleet that delivered Hostess cakes to stores. Instead the company relies on a warehouse distribution system, delivering products to their customer’s central warehouses.
Buyers may also be skeptical of the short track record in the revamped structure. After all, the company used to have 19,000 employees producing a larger line of goods including Wonder bread, and now runs with a workforce of just 1,500, while the 11 plants that used to make Hostess cakes are down to three.
Soma Biswas is a senior reporter and head of private equity coverage for Debtwire North America. She can be reached at Soma.Biswas@debtwire.com.
