Saturday, November 17, 2012

Twinkies Sink a Private Equity Investment

Twinkies Sink a Private Equity Investment

Hostess Brands, the makers of Twinkies and Wonder Bread, has filed for liquidation after two bouts of bankruptcy reorganization.  According to news reports, Ho Hos and Ding Dongs have been disappearing today as consumers snap up and wolf down the remaining inventory.    I expect that the brands and some of the plants and equipment will be acquired, so you should see the products again as you stand in line to pay for groceries.  The debt holders, largely hedge funds that specialize in making loans to troubled businesses, are going to take a sizable loss.  The unions, however, will bear the brunt of the liquidation, and the company’s pension plan will be terminated.  The equity had already been wiped out when the company filed for Chapter 11 last January.

Looking for Foreign Partners (1999)

Ripplewood Holdings, a private equity firm that specializes in turnarounds, provided a big slug of the equity.  The firm’s president, Tim Collins, is a big supporter of the Democratic Party and went into this deal with the specific aim of seeing if he couldn’t work with the union’s to rebuild Hostess Brands.  Ripplewood’s investment of $130 million in 2009 was part of a package that helped the company emerge from bankruptcy the first time.
The bankruptcy proceeding was a battle of Democratic investors.  Ripplewood was aligned with the former House Majority Leader, Richard Gephardt, in an effort to keep Hostess Brands independent (Gephardt’s consulting firm took a stake in the deal).  They were pitted against Grupo Bimbo of Mexico, which owns Sara Lee, Thomas’s English Muffins, and Arnold’s Bread.  Grupo Bimbo, which wanted to acquire Hostess, was allied with Ron Burkle, close friend of President Clinton.  Today, Ripplewood probably wishes that they’d lost out to Grupo Bimbo and Ron Burkle.

In emerging from bankruptcy the first time, Hostess’s debts were reduced, and the size of the work force and wages were cut.  Much of the debt, however, came at a hefty price, as the hedge fund lenders demanded large interest payments.  In 2010-11, Hostess Brands could not generate enough sales to cover its costs and particularly, its debt burden.  In fact, Ripplewood put another $40 million into the company in 2011 in effort to stave off bankruptcy and try to salvage its investment.  By February, it was clear that Ripplewood had miscalculated, and the company filed for bankruptcy protection again.  This is Ripplewood’s second high-profile bout with bankruptcy.  In 2009, they lost their $275 million investment in Reader’s Digest when that company filed for bankruptcy.

This is a cautionary tale for private equity investors.  For all the talk of quick profits, turning around troubled businesses is no easy task.  While the various products of Hostess Brands are well known, their market share has been slipping for many years.  Moreover, the company has operated out of antiquated plants under restrictive work rules.  No amount of financial engineering or operational acumen could rescue Hostess or Ripplewood.   

Don’t be surprised if another private equity firm acquires Hostess or Wonder Bread.   With the union vanquished, the next private equity owner could make a lot of money feeding your craving for Ho Hos, Ding Dongs, or Sno Balls.


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