Hostess Brand Is Now A Public Company

November 21, 2016

The maker of Twinkies, Ho Ho’s and Ding Dongs, Hostess Brands, early last week made its return to Wall Street. Hostess is now listed on the Nasdaq Stock Market with the ticker symbol TWNK. The company’s shares rose 5.5% to $12.12 on Monday.[1]

History of Hostess Brands

If you still remember, back in November 2012, Hostess went out of business due to a labor dispute and stopped producing one of American’s iconic snacks, Twinkies. Following the news, people rushed to the grocery stores to get themselves Twinkies boxes, which were thought to be some of the last boxes being produced by Hostess. There were a couple of bids for Twinkies on Ebay starting at $200,000 a box (see below).

In March 2013, two private equity funds, Apollo Global Management LLC and Metropoulos & Co came in and acquired Hostess Brands for $410 million.[2] The two investment firms also invested an additional $250 million to improve the production and distribution process.[3] Hostess started using robots to pack Twinkies into boxes instead of workers; the company utilized a central distribution system and doubled the shelf life of the snacks from approximately 30 days to 65 days.

According to an article on Forbes, the two investment firms predicted $100 million in EBITDA for 2014; instead, EBITDA was $178 million that year, representing 2.3x EBITDA based on the acquired price of $410 million.

Four months after Apollo and Metropoulos took over Hostess Brands, the Twinkies came back to the market. According to an article on Forbes, the two investment firms predicted $100 million in EBITDA for 2014; instead, EBITDA was $178 million that year, representing 2.3x EBITDA based on the acquired price of $410 million.

Sources: CBSNews [4]

Special Purpose Acquisition Company (SPAC)

Typically, in a turnaround situation, a private equity firm would buy out a company, improve its operations and increase the company’s EBITDA. The private equity firm then would sell the company to a financial or strategic buyer or do an IPO. Apollo and Metropoulos bought Hostess Brands and helped to improve the company’s operations. However, in this case, the two private equity firms utilized a different strategy. Hostess Brands was acquired by a special-purpose acquisition company (SPAC), also known as blank-check company, called Gores Holdings Inc.

Gores Holdings Inc. was a SPAC created by a Los Angeles private equity firm, The Gores Group. In July 2016, Gores Holdings bought Hostess for $725 million with an enterprise value $2.3 billion or 10.4x the Company’s estimated 2016 adjusted EBITDA of about $220 million.[5] Hostess reported revenue of $650 million in the 12-month period ended in May 2016.[6]

So what is a SPAC?

A SPAC is a business entity formed for the purpose of acquiring one or more companies through an initial public offering (IPO). The proceeds raised in the IPO are used to buy one or more companies. Typically, the industries or acquisition targets are not identified until after the IPO completes. The management team of the SPAC has 18–24 months to do a business combination, and this timeframe can vary for different SPACs.[7]

Approximately 100% of the proceeds raised in the IPO are placed in a trust account and are not permitted to be released until the business combination is completed. In the case that an acquisition does not happen within the specified timeframe, the money held in the trust account is to be returned back to the public investors through a redemption of public shares.

SPAC securities usually include one share of common stock with one warrant to purchase the common stock. The warrants are usually “out of the money” and are not exercisable until the SPAC acquired another business and. For example, if the price per share in the IPO is $10, the warrants may have an exercise price of $11.50 per share.

The structure of a SPAC is quite comparable to one of a private equity. Investors pool money in a fund, and the management team of the PE fund or the SPAC finds an established and attractive business to invest in. The difference is that investors who invest in a private equity fund are not able to withdraw their capital for a long period of time, typically 5–10 years. SPAC investors can hold the public shares until an acquisition target is identified. However, if the investors decide that they do not want to be an investor after the acquisition, they have the ability to sell their shares in the open market or redeem their shares at the liquidation value per share (usually the IPO price).

Timing of Twinkies IPO

Some people may argue that Hostess Brands went public at a bad time since consumers start to shift to a healthier eating lifestyle. Nevertheless, Twinkies and Ho Hos are parts of childhood memories for several Americans. According to Emily Balsamo, an analyst at Euromonitor International, Hostess has “a huge nostalgia and kitsch factor; [e]veryone knows what a Twinkie is.”[8] Nostalgia itself contains significant value for Hostess Brands.

According to Emily Balsamo, an analyst at Euromonitor International, Hostess has “a huge nostalgia and kitsch factor; [e]veryone knows what a Twinkie is.”

Hostess has been around for a long time; specifically, Twinkies is a 86-year-old brand. Consumers are likely to continue to buy Twinkies due to the Nostalgia Effect. The company is likely to tap into that nostalgia moving forward to expand its top line revenues.

SPAC Activities Are Picking Up

Before the credit crisis in 2008, SPACs accounted for almost 25% of all IPOs.[9]According to data from SPAC Analytics, there were a total 83 deals with gross proceeds of approximately $16 billion during the 2007–2008 period. SPAC activities started slowing down after the financial crisis until last year. There were 20 SPAC IPOs in 2015 with gross proceeds of about $4 billion and 12 SPAC IPOs so far in 2016 with gross proceeds of $3.2 billion.

The IPO market has been lackluster in 2016. According to Dealogic, 54 US IPOs raised $11.5 billion in the first seven months of 2016 — down from $22.9 billion raised during the same period of last year.[10] While SPACs activities in 2015 and 2016 are still not close to what they were used to be in 2007, the Hostess deal could potentially stage a comeback for SPAC vehicles.

Minh Le is an Associate at North Capital Private Securities, a registered broker-dealer focused on the marketing and distribution of private funds and securities.

Disclaimer: I do not own this stock.

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