It may have been awhile since you’ve taken a chomp out of a Twinkie or a Ho Ho, but now you can own a slice of the company in a transaction filled with more investment lessons than cream filling.
Hostess Brands, the maker of iconic snack cakes, announced last week it’s returning to Wall Street as a publicly traded company. It’s a comeback story following a buyout that took it out of its second trip through bankruptcy protection. Private equity firm Gores Group is buying a majority stake of the company and will fold it into its publicly traded entity Gores Holdings (GRSH). Shares of Gores, which will be renamed Hostess Brands once the deal is finalized, rose roughly 2% in the week on the news.
Gores, and the other private investors, are pitching the deal as a way to take part of a revitalization of a company with 90% brand awareness and “upside potential,” according to a transaction announcement filed with the Securities and Exchange Commission. Hostess is looking to finance its heavy load of $991.8 million in debt with fat profit margins. Those profit margins are in part due to aggressive cost cutting. That includes the closure of eight of its 11 bakeries, an 85% headcount reduction to 1,170 employees and more efficient supply chain management. Hostess also extended the shelf life of its average product by 150% to 65 days.
The Hostess deal highlights a number of trends for investors, including:.
•The emergence of special purpose acquisition companies (or SPACs). Gores Holdings is a financial entity that went public in 2015 with the purpose to find an attractive buyout candidate. These vehicles have become attractive to large investors as the shares tend to be stable leading up to a deal being done and investors don’t have to approve of proposed deals, says Jay Ritter, professor of finance at the University of Florida. SPACs are being used to buy companies in stable industries and try to drive more profit out of them, says Matt Kennedy, analyst at Renaissance Capital. Cookware maker World Kitchen, which makes Pyrex, is being taken public through a buyout by GP Investments (GPIA) and fast-food chain Del Taco (TACO) was taken public this way, Kennedy says.
•Don’t just buy Hostess because you like Twinkies. If you’re looking for reasons to buy into Hostess, your love of Ding Dongs and Zingers shouldn’t be your top consideration, says Robert Johnson, CEO of American College of Financial Services. Liking a company’s products might be a good initial filter. But, “do your homework to determine if the company has good future prospects and can be bought at an attractive price,” he says.
•Expect more such deals. Original investors in Hostess following the latest bankruptcy have already gotten much of their money back, and greater profits could be coming, says Robert Reich, professor at the University of California-Berkeley. The big gains resulting from cutting costs and workers, not by creating new products, sends a clear message, he says. Expect buyout firms to be looking for “old companies that are barely functioning,” he says. “By buying a brand (and) firing everyone,” they’ve shown there’s still value. This says to the investing community, ‘There’s still lots of low-hanging fruit around,'” he says.