Hostess Brands LLC, the maker of popular snacks like Twinkies, had been looking to cash out via a sellout, but according to a report from Reuters, Hostess has had a change of plans.
At least for now, it appears, a Hostess Brands IPO is in the cards.
But will investors bite?
Gauging a Hostess IPO
The most important thing to point out is how little information is actually available on Hostess. After all, Hostess is a private company, so it’s not compelled to open its books until it makes an S-1 filing — which it hasn’t yet.
Still, any deal would represent a big-time turnaround for Hostess Brands, which in 2012 filed for Chapter 11 bankruptcy protection thanks to sagging revenues and bloated pension costs.
And it wasn’t even its first bankruptcy filing — Hostess Brands went broke in 2004 as well.
Still, in early 2013, private equity operators Apollo Global Management (APO) and Metropoulos & Co. saw an opportunity, and bought the assets of Hostess Brands for $410 million in cash. Besides Twinkies and Ding Dongs (which are great enough on their own), the brand portfolio also included Mini Muffins, Cup Cakes, Ho Hos, Zingers and Suzy Q’s, not to mention several bakeries across the U.S.
Apollo and Metropoulos wasted little time rolling up their sleeves and getting Hostess Brands back into shape, cutting costs, revamping bakeries and even implementing an enterprise resource planning system from SAP (SAP).
Of course, they had to act fast — Hostess products were pulled from shelves thanks to the bankruptcy, which meant they had to implement a distribution plan quickly.
The firms decided to focus on Hostess’ cake products because of their longer shelf life (which in turn provides lower shipping costs and reduced spoilage). They also invested in R&D to develop better recipes to extend that shelf life further (to about 65 days — no, Twinkies don’t actually last forever).
Meanwhile, workforce productivity boomed as well — Hostess Brands previously needed 9,000 employees and 14 factories to generate $1 billion in cakes each year, but under the new plan, it could generate the same amount with just 1,000 people and three plants.
As a result, Hostess Brands has suddenly become quite profitable. According to the previously linked Forbes article (which does an excellent job recounting the turnaround), the company posted EBITDA of $178 million in 2014, compared to the forecast of $100 million.
So … why did Hostess Brands decide to ditch its plans to sell out?
That answer is far from clear. Based on various reports, it sounds like there was interest from suitors like Grupo Bimbo (GRBMF), Flowers Foods (FLO) and Post Holdings (POST) for valuations above $2 billion.
But sometimes an IPO can be a way to juice up the buyout offers and create more urgency. No doubt, Apollo and Metropoulos know this game extremely well. So in the end, this buyout interest will likely be a support for the valuation of a Hostess IPO.
And with the new lower-cost structure and aggressive efforts to expand distribution, Hostess should enjoy more growth ahead — and that bodes well for an eventual Hostess Brands IPO.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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