$900 Million Payday Is Billionaires' Reward For Crushing Twinkie-Maker's Labor Unions

Tyler Durden's picture

Two days ago we reported that according to the new Chief Restructuring Officer of America's "first national supermarket chain", Great Atlantic & Pacific, also known as A&P, Superfresh and Pathmark supermarkets, which just filed its second chapter 11 bankruptcy protection in 5 years, it did so for one main reason: unions, and specifically legacy Collective Bargaining Agreements which made profitability for the (heavily levered) company impossible.

While that argument is debatable, and as we said "if it wasn't for unions, it would be something else, like loading up on massive amounts of debt to repay Yucaipa's equity investment, which would then be unsustainable once rates rose and once interest expense became so high it soaked up all the company's cash flow" one thing that is absolutely certain is that what A&P just did is a flashback to what Twinkies' maker Hostess itself did as part of its November 2012 Chapter 7 bankruptcy liquidation.

Then, too, the company sought to crush labor unions who "refused to negotiate in good faith", and as a result the company went bankrupt, thereby ending all of its legacy labor agreements once and for all.

Sure enough, freed of its cash-draining labor obligations, Hostess suddenly became a very attractive target and not only did it survive but it fourished when in 2013 Private Equity titan Apollo Global Management and billionaire investor C. Dean Metropoulos acquired the maker of Twinkies from liquidation.

Very shortly thereafter, the equity investors did everything they could to reward themselves for an investment in the newly labor union-free company, which was quite viable as a standalone entity because demand for its products was as high as ever (the US will never have a problem with lack of obesity) and tried first to sell the company and then to take it public. They were unable do achieve either, so they decided to take a third route, one which takes advantage of the unprecedented debt bubble.

As Bloomberg reports, "Hostess is selling $1.23 billion of term loans. Of that, $905 million will be used to pay a dividend to its shareholders, according to Standard & Poor’s. That’s more than double what they paid for the business."

Translated: after investing $410 million in March 2013, two billionaires are about to make a $500 million return an investment they have held just over two years, with the blessing of a whole lot of debt investors. And all they had to do was pick up the carcass of a company which did nothing more than crush its unions.

Somewhat snydely, we hope, Bloomberg adds that "the deal is just the latest example of how record-low borrowing costs from the Federal Reserve are encouraging risky companies to add cheap debt -- sometimes to enrich private-equity firms -- as investors clamor for yield."

Not sometimes: every time there is a bond bubble resulting from years of ruinous monetary policy and cheap rates, it is the equity backers who are left with all the profits. In this case, Apollo and Metropolous will make a more than 100% return over a holding period of less than two years.

They are not alone: "So-called dividend deals reached almost $16 billion in the second quarter, the most in a year, according to Bloomberg data. The downside of the loans is they can increase a borrower’s risk of default by piling on debt, without any of the cash going to improving operations or boosting revenues."

“Dividends aren’t designed to create value for the company,” Moody’s Investors Service analyst Brian Weddington said by phone. “This is a return of capital and profits to the founding investors.”

No, the value for the company, its equity sponsors will claim, came from their involvement, and indeed company operations did pick up modestly:

Business at Hostess has improved since the buyout. Earnings have increased “substantially,” said S&P’s Chiem. Revenue has risen to more than $600 million, and earnings before interest, taxes, depreciation and amortization to nearly $200 million, according to S&P. The snack business was able to cut costs by storing its products in a warehouse rather than delivering them directly to stores from where they’re made, according to Chiem.

Happy with their achievement, which was only made possible as a result of the unbundling of the underlying business from its labor union ties, barely one year after their involvement, the billionaire owners sought to capitalize on their investment and Hostess began considering a sale last year, with sources saying in November that the business could fetch as much as $1.6 billion.

The sale process went nowhere, as did a subsequent attempt to take Hostess public.

So, why not follow the path of least resistance, and present credit investors using "other people's money" with the chance to repay them. This is precisely what they did about to happen courtesy of Credit Suisse which is the lead underwriter on the new debt financing.

Credit Suisse is leading the financing, which consists of an $825 million first-lien loan and a $400 million second-lien offering, according to data compiled by Bloomberg. It has asked investors to commit by July 30.

But don't say the new creditors, secured by a whole lot of Twinkies and Ho-Hos in company inventory, did not put up a fight demanding fair terms: "At a July 16 meeting held at Credit Suisse Group AG’s New York offices, potential investors were offered treats including Hostess orange cupcakes, according to three people with knowledge of the meeting. They were also offered an interest rate of as high as 7.75 percentage points" above LIBOR.

End result: a company that went from 2x EBITDA leverage to an eye-popping 6x!

For Hostess, the deal will triple debt levels to about six times a measure of earnings, according to an S&P report this month. Regulators including the Federal Reserve and the Office of the Comptroller of the Currency said in their 2013 leveraged lending guidance that debt levels exceeding six times raise concern as they seek to curb risky underwriting.

The irony is that Apollo would have pulled out even more cash if there wasn't a leverage cap. Still, even with "only" 6 turns of EBITDA in debt, most know how this deal will end:

The dividend demonstrates “a very aggressive financial policy,” S&P analyst Bea Chiem said in the report. The credit grader is keeping Hostess’s corporate rating at B, or five levels below investment-grade, on the view that the baker’s operating performance will continue improving. The junior-ranked loan being marketed is rated CCC+, or seven levels below investment grade.

In short: we give Hostess about 1-2 years before it files Chapter 33: it third bankruptcy a first one in 2004 and the second one in 2012.

Only this time there will be no unions left to blame: it will be all about the insurmountable leverage, and the rapacious greed of its PE sponsors to strip the company of all pledgeable assets and extract as much cash as possible in the shortest possible time, while layering what the IMF would clearly dub is insurmountable debt.

But before you blame them, blame the creditors who made it possible: all those "investors" who were tempted with "Hostess orange cupcakes" to dump billions of other people's money entrusted to then, just so they could generate a modest return.

And before you blame these individuals who are merely looking after their year-end bonus which is contingent on beating some risk (or rather return)-free benchmark, blame the Fed whose 7 years of ZIRP has made this kind of asset strip-mining not only possible but an acceptable, daily occurrence.

Because the end result is clear: after the unions were crushed, and Hostess emerged with a clean balance sheet, the fact that it already has 6x debt guarantees it will be bankrupt once again. The only question is when.

The losers will be the thousands of non-unionized full and part-time workers at the company.

The only winners: the billionaire investors who are about to get even richer thanks to none other than the Federal Reserve and an entire world filled with lunatic central bankers who have clearly taken over the asylum.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
NidStyles's picture

Imagine that, kill the parasites and you can make profits.

NidStyles's picture

Greed implies you are taking from someone else. In this case they are creating it through the magic of modern banking and living off the excess. 

p00k1e's picture

Pay the bakers less. 

When I buy concrete work, for example I set my labor rates to that of the illegal.  If the others can’t compete with them, starve.  

General Decline's picture

Twinkies are really crappy junk food but the are good for testing the reliability of an AK-47 https://m.youtube.com/watch?v=kIuni6_K_RQ

The Juggernaut's picture

Anarcho-capitalist flag.  Very nice.

James_Cole's picture

As with all of these articles, zh'ers will not read the text and then say some stupid 'fuck unions.' Ya.. y'all are real 'awake' and enlightened.

Because the end result is clear: after the unions were crushed, and Hostess emerged with a clean balance sheet, the fact that it already has 6x debt guarantees it will be bankrupt once again. The only question is when.

ATM's picture

Then who would lend them the money to do the deal? 

 

Oh wait, the banks securitize them up, slap on some worthless AIG type A+ guarantee and default insurance that won't pay, then sell them as AAA gold.

James_Cole's picture

Oh wait, the banks securitize them up, slap on some worthless AIG type A+ guarantee and default insurance that won't pay, then sell them as AAA gold.

>The credit grader is keeping Hostess’s corporate rating at B

7.75%, tough to resist!

Soul Glow's picture

As much as unions are hated I hope people realize their purpose is to stand up to tyranical corperations.

NidStyles's picture

Actually it was to get regulations passed to improve working condition in mines and steel works. Had shit to do with corporations, and in fact many corporations just raised their wages to appease the workers into not unionizing. Ford is a primary example of this. 

loonyleft's picture

Actually it was to get regulations passed to improve working condition in mines and steel works. Had shit to do with corporations....because mines and steel works were not owned by corporations? Who were they owned by? 

Meat Hammer's picture

He was making a blanket statement about corporations, instead of citing the birth of unions in a specific industry.

847328_3527's picture

I thought Twinkies were the nice fellows who live together down the street? At least that's what all the neighbors call them. There's a cupcake like that too?

monad's picture

I thought their purpose was to facilitate corporate-political objectives such as transfering benefits from employee compensation to crony managed citizen liability and coordiate with CFR-HR shills to crush any segments of the population capable of resisting aristocratic domination (thats absolute tyranny). Because thats what they do. The history of teacher's unions is most profane, but Hollywood has taken the crown from Religion.

FL_Conservative's picture

Especially when Credit Suisse is getting 50-80bps for making it rain.  Bankers need to pay their bills too, you know!

SMG's picture

Unions aren't the answer.  They're just used as a scapegoat when the Banksters want to rape the peasants.

The real answer is for people to start paying attention and asking questions like:

"How do all these awful trade ageements affect me?"

"Hey why with around 30% real unemployment are we allowing massive waves og legal and illegal immigrants into the country?"

"Why is the income gap between rich and poor bigger than ever?  It's like the system is rigged against the little guy hmmmmm"

You know something like that. 

 

 

DeProgrammed's picture

ZHers, help educate me. I've read in various articles that the decline of the middle class was largely due to the decline of unions. I know offshoring jobs has also been a large factor, but I'd like some opinions on this.

Did unions help kill of the middle class or did price competition due to a globalizing industrial structure kill US unions, hence killing the middle class?

SMG's picture

There's so many factors that are causing the decline of the middle class, unions really didn't have anything to do with it.

The main cause of the decline of the middle class is the fact the we are an Oligarchy and the Oligarchs hate the middle class because they are a threat to their power, and they don't want us using their resources.

Oligarchs control the banks, the fed, the government, large corporations, education, media and so on.

They eventually want to kill us.

At least that's how I see it.

 

Meat Hammer's picture

As far as unions go, I think public-employee unions are fucking parasites and are definitely a big factor.

EDIT: But the biggest factor is what detached.amusement says below.

ejmoosa's picture

You really do not believe unions had anything to do with the decline of Chrysler or GM?

Seriously?

Meat Hammer's picture

Ok, let's make this simple:

Some corporations are evil.

Some private-sector unions are evil.

All public-employee unions are evil.

End the Fed.

ejmoosa's picture

Anything that prevents two consenting adults from agreeing to a salary/wage is evil.

HopefulCynical's picture

When your 'consent' is driven by the fact that you're fucking starving, and the oligarchy has rigged the entire game from end to end, yeah. That's not a very valid form of 'consent.'

End the fucking Fed, hang the goddamn banksters - from EVERY COUNTRY, and let's try actual free market capitalism for once.

detached.amusement's picture

The entire decline of the middle class can be traced back to one concept: 

 

BANKSTER FRAUD. 

 

A centralized monetary issuing authority is the absolute BANE of a peaceful and prosperous world.

DeProgrammed's picture

Those are answers that make sense, getting to the root of the problem. I guess I wasn't seeing the forest for the trees, needed to take one more step back.

MasterControl's picture

Ok so the problem is banking and not politicians.  Got it.

Billy the Poet's picture

If Standard Oil was evil because they were a private firm which satisfied the needs of 64% of the market then the Federal Reserve which is a government mandated cartel which controls 100% of the market must be very, very evil,  Dontcha think?

Baldrick's picture

understand that congress created the banking system and benefits from the fraud so they don't want it to change.

Billy the Poet's picture

Some might call it a "cunning plan."

PT's picture

Haven't you seen the revolving door? What's Eric Holder's new job? Where are all them ex-Goldman Sachs execs working? ...

PTR's picture

ZHers, help educate me. I've read in various articles that the decline of the middle class was largely due to the decline of unions. I know offshoring jobs has also been a large factor, but I'd like some opinions on this.

Did unions help kill of the middle class or did price competition due to a globalizing industrial structure kill US unions, hence killing the middle class?

 

Yes.

PT's picture

DeProgrammed:

First consider a closed Economy:  Every worker is someone else's customer.  Rich workers, rich customers.  Poor workers, poor customers.  Of course, if there is no production then there are no customers.  Likewise, if there is production but no wages then there are still no customers. 

Now add a "leak" to the closed economy:  Cheap foreign labour.  Now the workers in the expensive economy "kill themselves".  They buy the cheaper product, thus destroying their own jobs. Another way of looking at it is as companies off-shore production they replace expensive workers with cheap workers BUT THEY ALSO REPLACE RICH CUSTOMERS WITH POOR CUSTOMERS.  (How much stuff from expensive-labour countries gets sold into the cheap-labour countries?)  So it is also true that the first company that off-shores its labour makes a profit but all companies who off-shore their labour are killing off the customer base of that economy.

"Why am I not making a profit?  I have the cheapest labour.  Where did all the rich customers go?"
Two capitalists have their knives at each other's throat.  Both say, "Why am I bleeding?  My knife is nowhere near my throat."

As the number of jobs decrease, people become more desperate to get a job, any job, and unions are ignored.  The de-unionization is an effect, not a cause.  Unless the people all decide, "I will not work for less than XXX", unions can't do jack shit.  People forget that the power of the union is not in the union reps but in the people themselves.  If the people are willing to fight, then the unions can direct the fight.  It is only during easy times that union reps can get out of hand (... but if things are too easy then the people won't want to bother giving up a good job for trivial shit either ...)  Of course, the unions are irrelevant if the company can not make a profit.  Why can the company not make a profit?  Cheaper, overseas labour and stupid consumers buying the cheaper product instead of protecting the jobs of their neighbours.

The latter is true:  globalisation killed the unions. 

Govt is mostly guilty for not protecting their country through border controls and tariffs.  Business is guilty for sending labour overseas for a quick profit, thus producing less rich customers.  Consumers are guilty for buying the cheaper product and putting local workers out of a job.

"Oh, I buy from Walmart.  Freddy's hardware store is too expensive.  Oh dear, Freddy no longer gets his car serviced here because he went bankrupt.  I wish Joey from Walmart could afford to buy a car and then I could service it for him" ...

 But there is more.

Many years ago I asked, "How much of our wealth is due to slavery (cheap foreign workers) and how much is due to technology increasing productivity?"  Because slavery-based wealth is not real wealth, it is just a misery-generator.  You only have to build big walls around your home if the people next door are much poorer than you.  (Okay, plus there really are some idiots out there ...)  Unfortunately I still have no answer to this question so I guess I'll have to figure it out myself (one day ....)

ZHers are quick to recognize that if they are not a part of the herd then they will not have to worry about following the herd over a cliff.  They are also aware that the herd is easily spooked into running over the cliff.  ZHers are mostly aware that if they choose to be away from the herd then they have to find their own way to deal with the crocodiles.  But a lot of ZHers don't seem to recognize that the benefit of being in the middle of a herd is that all the crocodiles get trampled by the herd in front of you.  (And sometimes an Argentine Ant analogy is better:  The ants at the front drown in the process of making an ant-bridge that the other ants use to cross the river.)

The bigger problem, at the moment, is the banksters and their access to free money.  Capitalism is no match for an idiot and his banker.  Two people work equally as hard, earn the same money, and then go to buy a house at auction.  Trouble is, one of them is an idiot (or desperate, but for the sake of this example, I'll stick to "Idiot" even though the person may not be too dumb ...)  Point being, the banker lends money to the idiot, the idiot bids up the price too high and ends up buying the house even though he can't afford the repayments.  What does the sensible person do?  Either he too "becomes an idiot" or he becomes homeless. 

But idiots can't afford to make repayments, they go bankrupt, houses go to auction and sensible people get them cheap?  The idiot bank that lent the money goes bankrupt and the sensible bankers make a decent living lending sensibly to sensible people?  No.  That is what is supposed to happen but these days the system is corrupt.  Even in a more honest situation, there is a large time lag between the idiot buying too expensive and the idiot going bankrupt.  In the mean time, many sensible people have either gone homeless or turned into idiots.  Sensible bankers have been sacked for "underperformance", passed over for promotion or gone bankrupt due to lack of business.  (Remember, the sensible people couldn't afford to buy houses as they were outbid by the idiots and their banksters).

In 2008, the banksters were supposed to go bankrupt.  Instead they were bailed out.  Any normal person who underperforms is sacked.  Any normal bankrupt is stripped back to minimum assets and minimum wages while they repay their creditors.  The banksters kept their jobs, their bonuses, and they continue to lend money to idiots.  Houses are kept off market to keep prices high.  Houses deteriorate and are demolished while sensible people go homeless. 

And even that is only part of the story.  The rest can be found in some of the articles on ZH.  (Not all articles, ZH has some crazy quirks and biases too, but at least those biases are opposite to what you find elsewhere.  Some sit on the swing and look and see that they have to go forwards and there are people out there who are willing to push them forwards.  Some sit on the swing and see they need to go backwards and there are people out there who are willing to push them backwards.  But you Must remember that THE SWING HAS TO STOP before you can get off.) 

To understand the housing / bankster problem, I recommend two books - Michael Lewis's "Liars Poker" and "The Big Short (Inside The Doomsday Machine)".  Simple, fun stories with a real, relevant message.  No I am not and don't work for Michael but I've recommended these books a thousand times, so apologies again to others who hear me keep raving on about them.  If you're not sure about buying these books, see if they're at your library.  Then I don't have to feel "guilty" about plugging them all the time.

Consider too, what would it take to compete with the poorer countries?  Technology?  But now the poorer countries also have access to the same technology.  We lower our wages to match?  Sure, if Mr Wong is happy to work for $50 per week then I too have to work for $50 per week.  But $50 per week in my country barely pays body corporate fees, let alone mortgages, food and all the rest of the bills.  Okay, so if my whole country drops its wages, then can we compete?  No.  Mr Wong lives in a hovel and shares bathroom facilities with 14 other families.  Are your housing costs that cheap?  We still have debt.  First world debt cannot be paid off with third world wages.  Shall we devalue real estate costs?  If we want to compete then we have to.  But companies borrow money and use real estate as collateral.  If real estate prices go down then companies go bankrupt as the banks demand more collateral.  Now you understand the real estate scam and why it is never mentioned.  In the time it took my wages to go up by 40% (due to upskilling - no unions involved), real estate went up by 400%!  As you can imagine, I was acutely aware when this happened.  Why does no-one talk about the negative effect of debt and real estate one our competitiveness?  I think I've already answered that one.

Too much info in one hit?  (I hope you still came back to look at this!)  If you're ready for a little more then now might be a good time to go to Wikipaedia and look up "Hyman Minsky" and His definitions for the terms, "Hedge Finance", "Speculative Finance" and "Ponzi Finance".  Then look at the meaning of "Minsky Moment".

DeProgrammed's picture

Thank you for the time and excellent response, not too much info at all, I am a sponge!  I'll be looking up what you suggested. Always interested in furthering my new education.

Divine Wind's picture

 

 

 

Good for them.

They saw an opportunity, risked their asses to the tune of $150 million and reaped a huge return.

All the rest of this article is white noise.

Anyone else reading this post who had the money and saw the opportunity would have made the exact same move.

Fuck the unions who scuttled the original company.

Capitalism works.

- DW

NidStyles's picture

Oh how dare those people intelligent enough to get into a position where they can profit do so. How dare they look out for their own best interests. 

 

You kids are fucking weak.

free shit plz's picture
free shit plz (not verified) NidStyles Jul 22, 2015 4:26 PM

Your understanding of anarcho-capitalism is fucking weak, please refrain from bearing your idiocy when bearing that flag.

Were you a proponent of anarcho-capitalism, remains to be seen, you would do well to focus on producers and merchants etc. who cater to their self interest by providing a good or service of value to others, win win, capitalism.

These financiers in question, are not providing a good or service to anyone, they are not productive, they are extractive. For a financier to profit today they need not provide any good, value or service to the real world; every profit is someone else's loss in the zero sum game of asset stripping financiers. A game which could not be played in a free or anarchic market devoid of central bankers, interest rate pegs and other such shit you would not be defending if you were ancap.

Billy the Poet's picture

When habitat is destroyed deer eat residential landscaping. This makes the deer evil. They should simply accept the loss of habitat and starve.

free shit plz's picture
free shit plz (not verified) Billy the Poet Jul 22, 2015 5:01 PM

All that time I just spent on a witty rebuttal to your bear analogy. Oh well, bambi is a socialist, just try and eat my bermuda!

Billy the Poet's picture

Bear with me, deer hart and give me the grizzly details.

PT's picture

When you say, "Deer", are you referring to the two paper-shufflers or the 3000 workers?

HopefulCynical's picture

These financiers in question, are not providing a good or service to anyone, they are not productive, they are extractive.

Exactly. This.

Billy the Poet's picture

But what does that have to do with crying over union workers who cut their own throats?

LibertarianMenace's picture

Perhaps the woodland creatures don't see the forest for the trees...or something.

free shit plz's picture
free shit plz (not verified) Billy the Poet Jul 23, 2015 6:09 PM

But what does that have to do with crying over union workers who cut their own throats?
-
-
-

Nothing. I felt this dogmatic nidstyles character was doing a disservice to ancap ideology trumpeting the risk free extraction of almost a billion dollars from a rigged market as 'capitalism'.

Theft of capital through financialization is not capitalism. Feeding a productive company with long-term viability a poison pill of financialization in order to make a quick buck, while destroying the company's existential prospects, is not capitalism, it is its exact antithesis.