The owners of the company behind the Twinkies brand are, according to reports, mulling a sale, just a year after buying the business.
Private-equity firms Apollo Global Management and C. Dean Metropoulos & Co. are planning to put US snack cake maker Hostess Brands LLC on the block early next year, Reuters said last week.
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Bloomberg, meanwhile, claimed Apollo and Metropoulos have spoken to potential advisers about their plans.
The private-equity firms are said to value Hostess at over US$1.7bn, including debt. However, a deal at that price so soon after acquiring the company would be a surprise.
Apollo and Metropoulos formed Hostess Brands LLC last March after buying the snacks assets of the old Hostess Brands – which filed for bankruptcy in 2012 – for $410m. Since then, the owners have made changes to Hostess’s production base, investing in some areas, but looking to improve efficiency and productivity in others. In August, Hostess announced it planned to close the Schiller Park site in Illinois where Twinkies products were first made in 1930.
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And there have been signs the reintroduction of Hostess’s brands into the market has made waves in the market. US baker Flowers Foods gained market share while the Hostess portfolio was absent from shelves but has since seen its rival battle back.
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By GlobalData“Anytime you have a major competitor come back in the market like Hostess Cake, there’s going to be an impact,” Allen Shiver, CEO of Flowers Foods and Tastykake owner, said in August. Last week, reporting Flowers’ third-quarter results, Shiver said the Hostess range was still putting pressure on Flowers’ branded and private-label cake business, although he was optimistic about the prospects for his company’s Tastykake brand.
Flowers has been touted in media reports as a potential buyer of Hostess. Flowers and the other major player in the US bakery sector, Mexico’s Grupo Bimbo, acquired bread assets from the old Hostess Brands when the company filed for Chapter 11 and both have been put forward as possible bidders, although some in Wall Street see that as unlikely.
“We think some strategics or financial sponsors could have interest in the asset; however, we believe it may be hard to negotiate a deal within the industry itself, as the space has become increasingly consolidated,” BB&T Capital Markets Brett Hundley, who covers Flowers’ shares, wrote last week.
“We don’t see Flowers being interested in the Hostess cake asset, if indeed it is for sale at this juncture. For one, we see Flowers as desiring to consolidate bread further, while moving into more on-trend, healthy categories such as tortillas, flatbreads, and artisan/premium breads. While the idea is logical that Flowers could stem Tastykake share losses by purchasing the Hostess cake asset, we believe that management thinks it can stem such losses with greater focus on its own business, and we would note our view of Flowers’ historical avoidance of unionised work forces.”
Hundley added: “Aside from desired strategy beliefs, we don’t see a Flowers/Hostess cake deal making much sense financially. If the reported price tag and our earnings estimates for Hostess cake are correct, we see a limited amount of accretion in year one, and the company would likely have to issue equity in order to stay investment grade.”
With uncertainty over whether the two main players in the US bakery sector would bid for Hostess, it seems unlikely a sale could happen quickly. And, although Apollo and Metropoulos would likely have acquired the Hostess cake assets at a lower price than usual with its parent under Chapter 11 protection, that uncertainty could, in the short term, make it on balance more difficult to reach the US$1.7bn the private-equity owners are apparently seeking.
Some industry watchers argue Hostess may have to do more work on areas like production and demonstrate it can hold firm against competitors before commanding that valuation.
Private-equity firms are always weighing up how to exit from their investment at some point down the line. Early next year seems too soon.
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