It was then that Hostess, at the time called Interstate Bakeries Corp., filed for Chapter 11 the first time and had attracted looks from Los Angeles private equity firm Yucaipa Cos. LLC and Bimbo Bakeries USA Inc.
Not much came of it. For a relative song -- $130 million in equity -- Ripplewood Holdings LLC ended up with control of IBC, which was renamed Hostess Brands on the company's Chapter 11 exit in February 2009.
At first blush, the auction this time around should go better for Hostess.
Twinkies, Ding Dongs and Wonder Bread are among the company's brands that nostalgic Americans have run to stores to buy. The bankruptcy proceedings of AMR Corp., the parent of American Airlines Inc., just haven't captured the public's imagination -- or fear for loss of product -- like Hostess' have. "Saturday Night Live" even spoofed Hostess -- Jamie Foxx played an aggrieved Ding Dong on the show's Weekend Update segment. Hostess right now is a cultural phenomenon.
But will the auction of Hostess be as soft as the middle of a Twinkie much like four years ago, before Ripplewood bought it on Feb. 3, 2009?
Doesn't seem like it. Hostess is now in talks with 160 potential purchasers for the sale of its assets, up from 110 in the last week of November, a company spokesman says.
"We have a high level of interest from strategics, a high level of interest from some customers and a high level of interest from some financial buyers," a sanguine Rayburn says.
Equally encouraging is that, globally, there's interest in the rights to Hostess' products outside the U.S. The company, for example, got two calls from interested buyers in India, Rayburn told those gathered for the Nov. 29 Deal Economy 2013 event at the New York Stock Exchange.
"I think it's going to go quickly, and we would like it to go quickly," Rayburn said. "What we want to do now is get stalking-horse bidders signed up as soon as possible."
What makes that more likely this time around is that not only are other food companies interested in the brands, but Hostess' own customers are, too. Also, while the brands aren't likely to experience meteoric sales growth, they do enjoy a strong sentimental following in the U.S. and have untapped potential overseas. And finally, there's Rayburn himself, a turnaround veteran who, by staring down Hostess' bakery and other unions, has taken away much of the labor and cost risk that scared away bidders years ago.
In fact, Rayburn, 54, expects "a pretty robust process" now that the brands have been uncoupled from the unions, pension plan liabilities and antiquated factories sorely in need of investment.
The managing partner of Kobi Partners LLC, a Kiawah Island, S.C., advisory firm, Rayburn became chief restructuring officer of Hostess on Feb. 22, roughly a month after the company's Jan. 11 Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of New York in White Plains. After being appointed CEO of the Irving, Texas, company, Rayburn was named chairman of the company's board of directors on March 13 after former CEO Brian J. Driscoll resigned.
While at Kobi, Rayburn has worked on the Indianapolis Downs LLC bankruptcy. Before that, while at FTI Consulting Inc., he was the chief restructuring officer of Magna Entertainment Corp., CRO at AAIPharma Inc. and CEO at Syntax-Brillian Corp. He has also served as CEO of New York City Off-Track Betting Corp., Muzak Holdings Inc. and Sunterra Inc. and CRO of WorldCom Inc.
Despite such a track record, Rayburn says Hostess was his toughest assignment to date. "Hostess was much more complex and challenging, in general, than ones I have done before," he said in an interview after the Deal Economy event, noting that the company's repeat bankruptcy status made it particularly daunting. "When you are trying to go through labor negotiations, it's just that much more difficult when you had concessions and now you are asking for more concessions. It also was complex. We had 364 [collective bargaining agreements] and 12 unions to deal with, and there were very difficult negotiations."
Before members of the International Brotherhood of Teamsters voted to accept a modified CBA with Hostess in September, the union had been threatening the debtor with a strike all spring, he says. But the IBT voted to accept the revised CBA on Sept. 14. The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, however, voted to reject it, and the BCTGM began a strike on Nov. 9. Just a week later, the company decided to liquidate its assets and wind down its operations on Nov. 16.
"That was a tough week," Rayburn said in the interview. "We had as much management as we could in the plants trying to run production so that we could get critical [stock-keeping units] out for our customers based in those geographies where we operate. By [Nov. 14], it was clear to me that short of some catalyst to really arrest this, we were digging a financial hole that we would never climb out of."
Rayburn is unabashed about Hostess' second bankruptcy case being a disaster. "It was a failure on the part of everybody involved in the process, from whenever the day one started until now, including me, because you can't have a result like that," he told Deal Economy attendees. "It's not acceptable."
While Hostess' reorganization attempt may have failed, though, Rayburn's ability to create certainty regarding the company's labor situation -- that negotiations are now a thing of the past -- may have been what eased the path for prospective buyers.
"What has surprised us is the number of interested parties that are credible and capable," Rayburn said at the NYSE event.
Particularly compelling is that Hostess customers are among those window shoppers. Hostess' customers include major grocery store chains, independent and chain convenience stores and megastores such as Wal-Mart Stores Inc. and Target Corp., a Hostess spokesman says, though neither he nor Rayburn would say if any of them are preparing a bid.
Jeff Lotman, CEO of Global Icons LLC, a brand-licensing agency, acknowledges that it would be unusual to see retailers buying brands, but he notes that, in this instance, it makes sense for one to own a brand such as Twinkies because it could give customers a reason to come into its stores.
Lotman points to several retailers that are involved in the food space, including Kroger Co., Wal-Mart and its affiliate Sam's Club, Costco Wholesale Corp. and Target. Any of them could be potential buyers for Hostess' brands, he says.
Calls to Wal-Mart, Costco and Target weren't returned, while Kroger spokesman Keith Dailey says the company doesn't "comment on rumor or speculation."
Kroger, which operates a chain of 2,425 supermarkets and multidepartment stores in 31 states, also owns nine bakeries, which advances the idea that the Cincinnati retailer could be a sound candidate for buying the brands, Lotman says. He notes Kroger could actually insert the brands into a current infrastructure that includes 37 food-processing plants and sell them in the 788 convenience stores and 1,124 supermarkets it operates throughout the U.S.
Other retailers that don't have Kroger's factories still have other options. According to Lotman, a retailer that wants the brands could talk to suppliers such as Flowers Foods Inc. and Bimbo Bakeries USA to decide who would make the products for them, similar to supermarkets having bakeries make their private-label foods. By having a national or regional bakery make the products for them, the retailers would avoid the need to buy Hostess' bakeries.
Calls to Flowers Foods weren't returned, while a spokesman for Bimbo Bakeries says the company has no comment on Hostess.
Not everyone buys the retailer-as-buyer scenario. One source that asked not to be named doesn't believe a Hostess customer or a retailer would buy the debtor's brands because they wouldn't want to sell their products to competitors.
Rayburn called the sale of Hostess whole or in parts a "once in a lifetime deal" because the products generate a total of $2.4 billion in revenue each year and were built as iconic brands more than 80 years ago.
"If you are going to be in this market, you have to have a way to make the product, and you have to have a way to ship the product," he explained during the interview. "We had the bakers' union making the product and our teamsters union shipping [and] driving the product. There are a lot of other alternatives out there, so for buyers, it will depend in part on what they have today, and if they don't have those things, they have to figure out a way to get them."
Hostess' national brands include Wonder Bread, Nature's Pride, Home Pride, Hostess and Dolly Madison. It also has regional brands, such as Merita, Colombo, Beefsteak, Butternut, J.J. Nissen, Cotton's Holsum and Drake's.
According to figures provided by the company, Wonder Bread had $475 million in sales for the year ended May 31, while Hostess-branded baked goods garnered $988 million. Regionally, bread brands Merita ($153 million in sales) and Home Pride ($148 million in sales) led the way. Drake's, a regional baked-goods brand, brought in $81 million in sales.
Some observers feel the brands are just too mature to be worth much to a buyer. John Loeb, a principal at investment banking firm J.H. Chapman Group LLC, which focuses on the food industry, says Hostess' product line is really quite old, sort of stale and likely hasn't had any growth beyond inflation in a number of years.
Even so, Loeb believes the brands will all be sold because of their popularity.
In fact, those historic buyers of mature companies in all types of industries -- private equity firms -- have already made their interest in Hostess known. Boca Raton, Fla., private equity firm Sun Capital Partners Inc. and Hurst Capital LLLP, a Sarasota, Fla., investment company, have confirmed they are interested in bidding on Hostess' assets.
What certainly helps the PE buyers' cause are two things. One is the prospect of foreign expansion; Rayburn told event attendees potential royalty streams from India, South America and Asia would've been a major centerpiece of Hostess' reorganization effort strategically. And second, PE firms likely won't have to compete with lenders during the bidding.
According to one source who is familiar with the Hostess bankruptcy but asked not to be named, lenders aren't likely to credit-bid for the company's holdings because owning and operating them isn't overly appealing, and any credit bid would be complicated by the multiple liens on various assets. The lenders are all over the capital structure, the source says, and they probably don't have much of an appetite to own the assets.
But those lenders may be the only ones not caught up in the fever surrounding Hostess. The company's Twinkies, Drake's coffee cakes and Funny Bones evoke in folks childhood memories steeped less in health consciousness and more in comforting after-school snacking. Few brands, Lotman says, have become as much a part of the fabric of people's lives as Hostess'. And right now that's not lost on possible buyers.
"There is a lot of interest because these opportunities don't come around a lot," he says.
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