Anybody grieving over their missing Twinkies is one step closer to getting those cream-filled treats back in their hands.
Bankrupt Hostess Brands has received permission from the bankruptcy case’s judge to sell the bulk of its brand names, including Wonder Bread, Drake’s and, of course, those beloved Twinkies (which actually fall under the Hostess line of products).
Although some private equity firms like Sun Capital Partners have made it clear they’d be interested in simply buying the whole company, that’s an unlikely scenario — public and private firms alike already have started to fly around the carcass like vultures.
Apollo Global Management (NYSE:APO) and C. Dean Metropoulos & Co. (owner of Pabst Blue Ribbon beer) have already put a joint offer on the table to buy the snack cakes brands, while Flowers Foods (NYSE:FLO) with its $390 million offer is the apparent front-runner for most of the bread brands, including Butternut and Nature’s Pride.
Truth be told, this is a case where the company might be worth more in parts than as a whole. Bankers familiar with the deal believe all of Hostess’ pieces could fetch a total of more than $1 billion. And it’s the fact Hostess is so keen on breaking the company up into its divisions that really has investors asking hypothetical and not-so-hypothetical questions about who can, who will and who should buy any or all of Hostess.
With that in mind, here’s some (pun intended) food for thought.
Who Should Buy Hostess’ Bread Division?
As was noted, Flowers Foods is at the front of the line for Hostess’ bread brands. Hostess sold nearly $1 billion worth of bread in 2012, with half of that coming from Wonder Bread — that certainly be a nice addition for Flowers, which generates about $3 billion in annual sales.
But it’s not a done deal. The bidding process doesn’t end until mid-March, and one of another couple dozen other companies with reported interest could come in with a bigger bid. It’s some of those other bidders that pose compelling combinations.
Walmart (NYSE:WMT) and Kroger (NYSE:KR) are two of those “other” names, though it’s not clear if those companies are interested in the bread division, the snack division or both; neither has commented on the rumors. It would be a smart move for both, though, as grocers have now started to realize the benefit of having in-house brands.
As agonizing as it might feel to give Walmart any more market share on any front, it could do the most with Hostess’ bread division. Though Hostess has several bread brand names under its wing, it’s still by and large a commodity. And for Walmart, it’s not even a commodity that has to be profitable; it could simply be added as a low-priced draw to its stores, where those shoppers can be sold higher-margin goods. Kroger wouldn’t be able to leverage those brand names themselves.
More realistically, however, Flowers will make sure it stays at the front of the bread line. Mexico’s Grupo Bimbo (PINK:GRBMF) subsidiary Bimbo Bakeries USA and Campbell Soup (NYSE:CPB) unit Pepperidge Farm are next in line.
Who Should Buy Hostess’ Snack Food Division?
There’s no denying the big enchilada is the snack food division, which would give a suitor not only Twinkies, but brands such as Dolly Madison, Standish Farms and Drake’s.
A company called McKee Foods has been courting Drake’s, and is reportedly ready to pay between $25 million and $30 million for the name. Apollo Global and C. Dean Metropoulos have collectively put $410 million on the table for the Dolly Madison and Hostess brands, which includes Twinkies.
Those aren’t done deals either, though.
In the same sense that Walmart was an excessively obvious buyer for Hostess’ bread division, PepsiCo (NYSE:PEP) is the no-brainer buyer for Hostess’ snack food units.
There’s no doubt that PepsiCo already has all the inroads it needs, offering not only the Pepsi line of soft drinks, but also Frito-Lay snack chip brands like Lay’s and Doritos, as well as Gatorade and Tropicana. It would take practically no effort at all to slide some powdered donuts and cupcakes into its distribution stream, and add more than the $1 billion in annual sales Hostess snacks are producing now. Indeed, PepsiCo might be able to rekindle growth for Hostess snacks, which have been bleeding sales for years.
Just for the record, though, PepsiCo hasn’t even been posed as a potential buyer by any analyst or media commentator.
Yes, Walmart also could take a swing on Hostess’ snack foods, but odds are WMT realizes snack foods are a little more complicated than bread. Quality and marketing and perception mean so much more with a snack food; those aren’t Walmart’s fortes, and the company knows that.
Other possible buyers include J&J Snack Foods (NASDAQ:JJSF), Bimbo, McKee and ConAgra (NYSE:CAG). Of those four, J&J and then McKee are best suited to handle new snack brands after PepsiCo.
There’s another interesting possibility, however … even if it’s a long shot.
What if struggling snack food name Diamond Foods (NASDAQ:DMND) could somehow bring at least part of Hostess under its umbrella?
It’s a crazy idea, to be sure. Diamond only has a little more than $100 million in cash and short-term receivables on hand, and it’s unlikely it would be able to get enough credit to make a play for Hostess and/or Dolly Madison. Yet Blackrock (NYSE:BLK) has been buying more of Diamond Foods, and one has to wonder whether Blackrock thinks the two snack food makers are not only underestimated, but could rebuild better by rebuilding together.
As I said, though, that’s a crazy long shot.
The Last Word
Only time will tell who gets what when the bidding ends on March 19. But, one thing does seem sure now: Twinkies will live on.
That’s the most important thing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
