Hostess is being acquired by JM Smucker in a deal valued at $5.6B after coming back from the brink

By
The Associated Press
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FILE - A Hostess sign is shown on a closed retail outlet store in Garland, Texas, Jan. 11, 2012. Hostess, the maker of snack classics like Twinkies and HoHos, is being sold to J.M. Smucker in a cash-and-stock deal worth about $5.6 billion. Smucker, which makes everything from coffee to peanut butter and jelly, will pay $34.25 per share in cash and stock, and it will also pick up approximately $900 million in net debt. (AP Photo/LM Otero, file)

Hostess, the maker of snack classics like Twinkies and HoHos, is being sold to J.M. Smucker in a cash-and-stock deal worth about $5.6 billion.

Smucker, which makes everything from coffee to peanut butter and jelly, will pay $34.25 per share in cash and stock, and it will also pick up approximately $900 million in net debt.

Hostess Brands Inc. shareholders will receive $30 in cash and 0.03002 shares of The J.M. Smucker Co. stock for each share of stock that they own.

“We believe this is the right partnership to accelerate growth and create meaningful value for consumers, customers and shareholders. Our companies share highly complementary go-to market strategies, and we are very similar in our core business principles and operations,” Hostess President and CEO Andy Callahan said in a prepared statement Monday.

Twinkies went big when Hostess put them on shelves in 1930, and it followed up with a string of sweet concoctions like DingDongs, Zingers and Sno Balls.

In an interview with The Associated Press this year, Hostess CEO XX talked about how the company managed some of the most well-known brands in America, and also how balance was needed as Americans’ tastes changed.

The company motored along for decades, but its struggles began to grow in this century, with workers blaming mismanagement and a failure to invest in brands to keep up with changing tastes. The Lenexa, Kansas, company said that it was weighed down by higher pension and medical costs than its competitors, whose employees weren’t unionized.

By 2012, the company with roots dating back to 1925, began selling off its brands in chunks to different buyers. Wonder was sold to Flowers Foods. McKee Foods, which makes Little Debbie snack cakes, snapped up Drake’s Cake, which includes Devil Dogs and Yodels.

The rest, including Twinkies and other Hostess cakes, was acquired by Metropoulos & Co. and Apollo, for $410 million.

Apollo Global Management, founded by Leon Black, buys troubled brands and tries to turn them around before selling them. It’s done so with fast-food chains Carl’s Jr. and Hardee’s. Metropoulos & Co., which has revamped then sold off brands including Chef Boyardee and Bumble Bee, also owns Pabst Brewing Co.

Hostess reemerged in 2013 with a far less costly operating structure than its predecessor company and was no longer unionized.

Morgan Stanley’s Pam Kaufman said that Hostess offered attractive revenue growth through its U.S. sweet snacks business and opportunities for international expansion. She anticipates merger and acquisition activity ramping up in the packaged food sector due to slowing revenue growth and strong balance sheets.

The boards of The J.M. Smucker Co. and Hostess have both approved the deal, which is expected to close in Smucker’s fiscal third quarter.

Smucker’s stock dropped 8% at the opening bell, while shares of Hostess surged 19%.

Commentary from Mickey Kim, Republic business columnist

How new owners turned Twinkies into solid gold
While 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 Hostess brand was founded in 1925 when Continental Baking bought Taggart bakery, the maker of Wonder Bread. Twinkies were invented by James Dewar in 1930 as a cheap bakery item during the Depression and became an instant hit. Ding Dongs and Ho Hos were introduced in 1967 and 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.” Under Chapter 11, Interstate continued to operate while attempting to “reorganize” its debts and business.
Interstate emerged from bankruptcy in 2009, with private equity firm Ripplewood Holdings
paying $130 million for control (and hedge funds Silver Point Capital and Monarch Alternative Capital providing $360 million of debt 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 on top of those given just three years earlier. 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.

This real-life drama played out here in Columbus, where Phillip “Sap” Essex and Gene Brierly took over a bakery in 1948 (thanks to The Republic for the historical assist). At one point, Sap’s Donuts employed 600, making it one of the biggest in the city. Sap’s merged with Beatrice Foods in 1972 and Beatrice was purchased in 1979 by Interstate (which changed Sap’s to Dolly Madison).
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 subsequently invested $160 million to upgrade and automate baking and packaging.
Key to success was abandoning the Direct Store Delivery (“DSD”) model, which utilized
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 (“DTW”) model, where all shipping is done by third-parties to customers’ warehouses. This resulted in distribution costs dropping by more than half, from 34% of sales to 16%.
Windfalls to M&A happened in quick succession. Hostess was able to borrow to pay a $905
million dividend to M&A in July 2015. In November 2016 M&A sold a 58% 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 their original investment of $186 million, M&A received the $905 million dividend, $725 million from Gores and are still left with 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 gold.

Mickey Kim is chief operating/compliance officer for Columbus-based investment adviser Kirr, Marbach & Co. He also writes for the Indianapolis Business Journal and can be reached at 812-376-9444 or [email protected].

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