20 March 2013

Twinkies Worth $410 Million

The discontinued Twinkie and related snack cake brands have been sold in a bankruptcy auction for $410 million to a pair of private equity firms, over the objections of Hostess labor unions.  The new buyers plan to get the snacks back on store shelves within about six months.  Some of the sale involves snack making factories and equipment, but most of the value of the transaction is for intellectual property, principally trademark related goodwill for the brands and the trade secret recipes.  The funds will add to the pot of funds used to pay the bankrupt company's creditors.

The Wonderbread and Nature's Pride bread brands together with twenty bakeries were bought by one of the company's competitors for $360 million.  The Beefsteak brand of bread was sold to another competitor for $31.9 million.  The Eddy's, Standish Farms and Grandma Emilie's bread brands were sold to a third competitor for $30.9 million.  A hearing on the sale of the Drake's Coffee Cake, Ring Dings and Devil Dogs were sold to a fourth competitor for $27.5 million is set for early April.

The total debts scheduled in the bankruptcy are about $1.47 million with much of this owed to secured creditors in amounts of hundreds of millions and the union pension fund.  These liquidations of large chunks of the business will net a bit more than $860 million, in addition to any asserts that were associated with any of the brands.  So, secured creditors and priority creditors (like the bankruptcy law firms) are likely be paid in full, general creditors are likely to receive a meaningful number of cents on the dollar, subordinated debt (about $100 million) will probably receive nothing, and the shareholders will almost surely be wiped out. 

To whom is the debt owed?  "Hostess lists the Bakery and Confectionary Union Pension fund as its largest creditor, with a debt of $994 million. Hostess is also behind in payments to a long list of suppliers, such as Cargill."

Given that the union bears considerably more than two-thirds of the brunt of any undervaluation of assets in the bankruptcy, it isn't too surprising that it was especially concerned about an undervalued sale.  Most of the company's bonds had been bought up by hedge funds at a discount who were more risk tolerant regarding the outcome of the banikruptcy than the long term holders of those bonds.  They were fine as long as they purchased the distressed bonds at a low enough price, and the bulk of the long term bondholders with less risk tolerance had already decided to cut their losses by selling out to the hedge funds.

The company's union will have to successfully unionize the operations of the new owners if it wants to continue to exist for any purpose other than linger implementation of the bankruptcy court's order.  It has been busted.  Management claimed that excessive demands from the union forced the bankruptcy, but the great disparity between the auction price and the amount of the company's debts casts serious doubt on that conclusion.  A declining market for junk food, rather than labor-management relations seems to be the most likely cause, even if union demands may have been the straw that broke the camel's back.

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