$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.

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Bananamerican'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"

spoken like a true Luciferian.

"I see an open window, i crawl in, still people's shit. They lose. I win. Self-interest™... shoulda kept their window shut."

"I see a group of 12 year old girls. They're weak. I kidnap 'em, force into prostittion. I profit! Self interest™"

"I tell some people I'm from the EPA and their prime pastureland and watershed is polluted with toxic waste. I'm intelligent. They're ignorant. They sell cheap. I profit. THEY lose! Ha Ha! Self-interest!"

Sucks to be you.

Billy the Poet's picture

When you get your paycheck that's like raping a puppy. It's true because I self righteously declared it to be true. There is no defense.

Dixie Flatline's picture
Dixie Flatline (not verified) NidStyles Jul 22, 2015 5:41 PM

Wow Nid, you got the lunatics howling at the moon.

They aren't responsible for their lunatic behaviour though.  It is the GMO's, chemtrials, and the jews forcing them to howl.

James_Cole's picture

Two years after Apollo Global Management LLC and Metropoulos & Co. acquired the maker of Twinkies from liquidation, 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.

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.

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.

They were also offered an interest rate of as high as 7.75 percentage points more than the London interbank offered rate on the junior-ranking, second-lien loan, with a 1 percent minimum on Libor, Bloomberg data show.

That compares with an average 4.28 percentage points more than lending benchmarks for new first-lien loans sold to investors this month, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data.

Will it still be 'good for them' when it goes bankrupt again? Real brilliant work taking a brand with big revs out of liquidation and then leveraging it the fuck up and paying yourself a big reward right before it goes back into bankruptcy.

https://www.youtube.com/watch?v=T-j5XWo1fPI

marathonman's picture

Don't worry the Fed will keep the banks that pushed that bad debt whole and make the rest of us eat the loss through inflation.  So its all good.

Billy the Poet's picture

And it all could have been avoided if the unions hadn't priced themselves out of jobs.

NidStyles's picture

Was the company even solvent when they picked it up? You and I have no idea what the real books look like, so they likely did what was in their own best interests and bailed. 

NihilistZero's picture

The investors reaping this windfall are the beneficiaries of easy lending and desperation for returns.  They staged no grand turn around of a failing company.  I can tell you explicitly why. The new Hostess products suck out loud.

Check any comment thread on the "new" Hostess and they will tell you the quality is terrible.  Mind you, we're talking about mass produced sugar and calorie filled death cakes, so the bar was pretty low to begin with.  Apparently those union workers added something to the product after all...

I'll admit to having an affinity for their cup cakes from time to time.  Tried some of the "new" cup cakes recently, not only do they taste worse, they were smaller.  So for those of you saying "capitalism works" we'll see how long they can maintain sales with a lower quality/quantity product.  All we have evidence of is that "crony capitalism" through the FED, whose easy money policies finance so many of these mergers and acquisitions, can make a select few big money.

NidStyles's picture

Capitalism work, just keep watching, when the whole shit show collapses, that is capitalism in action. 

detached.amusement's picture

You keep conflating that which makes capitalism good and viable with that which undermines and destroys it.

 

and then you ascribe the same word to both!

 

*facepalm*

FL_Conservative's picture

Capitalism DOES work.  The problem, in this day and age, is that too many things (i.e., businesses and governmental entities) are run by BANKSTERS and LAWYERS who don't know DICK about how to RUN a business, but most certainly understand financial manipulation and/or the manipulation of people, the laws that govern them and the press that (mis)informs them.  

ejmoosa's picture

It works when you have it.

What we have is not capitalism.

RaceToTheBottom's picture

In the land of free moeny, there is no risk.

joak's picture

This is not capitalism, this is finance... extracting money on the short term without any consideration for the perenniality of the company. 

ElixirMixer's picture

100 percent of all bankruptcies are the fault of management, not unions. After all, it was management that entered into the contracts in the first place. This company has been bankrupt twice in the past ten years and I guarantee you it will be bankrupt again. Anyone stupid enough to buy these bonds deserves whatever is coming to them.

ejmoosa's picture

Who gave the unions the power?  The Feds did.  They enabled the unions to block non union labor, and even forced non union workers to contribute to the union coffers.

Give me a break.

TimmyB's picture

Not really. The fed neutered union power when it made most strikes illegal. Sure, in some states you can have non union members pay union dues. However, those dues are considered compensation to the union for negotiating contracts and representing the nonunion workers.

However, these same federal laws prohibit secondary boycotts and sympathy strikes. An employee in the U.S. can only go on strike against a primary employer. For example, Disney employees cannot join a strike against ESPN, a Disney owned corporation, when ESPN workers go,on strike.

Additionally, a union cannot refuse to handle cargo from a nonunion manufacturer.

These laws neutered the labor movement in this country and destroyed worker solidarity. Unions in European countries don't have these restrictions. That is why unions in Europe are stronger and living conditions are better.

James_Cole's picture

Anyone stupid enough to buy these bonds deserves whatever is coming to them.

People buying this shit are rarely stupid, they'll make a mint for themselves and losses will be passed on.

Miffed Microbiologist's picture

Capitalism is defined as an "economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth."

Wealth is defined as "an abundance of valuable possessions or money"

Money is defined as "a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively."

Given this, I don't see how this situation has anything to do with production, distribution or wealth and therefore cannot be defined as capitalism. Perhaps another word would be better. I can think of a few choice ones.

Miffed

NidStyles's picture

Personal initiative is far more valuable than personal morality. Morality is a tool that the weak use to manipulate the stronger. 

 

Strength and pwoer are capital resources in any open exchange. The person bargaigning from a position of strength and power can get a better deal than the person bargaigning with neither. 

 

 

Billy the Poet's picture

Morality is a tool that the weak use to manipulate the stronger.


Don't buy into the altruists' false definition of morality. Morality is a function of natural law and a product of reason.

Billy the Poet's picture

Yes, I read that thirty years ago. Glancing over it now I notice that the Old Man sounds a lot like Ayn Rand but without the conviction. Twain's cynicism provided his best humor but as he grew older and saw his wife and children die that cynicism turned in on itself.

maxamus's picture

What you just did was the same as someone blaming the rape victim for how she was dressed.

Tom Servo's picture

And the current C-level execs will have long pulled the cord on their golden chutes before that implodes.

 

CHTR / TW merger is going down a similar path.. That aught to be fun to watch as well...

SMG's picture

You might want to rethink that, because I'm starving and you sound delicious.

J Pancreas's picture

+1 pookie. All your downvotes are coming from people who have no real world small business experience. It reminds me of those slugs clamoring for a "living wage" at entry level unskilled jobs like MCD or WMT. Instead of sucking someones dick and living off someone else's personal risk who started or expanded a business start one yourself. Take a risk. ZH is getting populated with mindless drones sitting in a comfortable office making 40k a year and getting fatter everyday. Losers.

detached.amusement's picture

if you dont want to see the problem, why are you looking

falconflight's picture

By George, you've driven that nail all the way to the board judging by the votes of the too close to home down arrows.

MayIMommaDogFace2theBananaPatch's picture

ZH is getting populated with mindless drones sitting in a comfortable office making 40k a year 

Uhh, sure, right -- and according to creepy.cracker (below) the Twinkie makers got all the way up to 200K / year.

Creepy A. Cracker's picture

I see that reading comprehension is not your strong point.  I'm sorry.

Creepy A. Cracker's picture

Twinkie-Maker's Labor Unions

Becasue EVERYONE knows that pressing a button on the Twinkie making machine is a "skill" worth $200K/year.

A Nanny Moose's picture

Such highly demanded skills qualifies them to join the Baker's Union. What's that say about the Baker's Union?

Deathrips's picture

Extensive permitting and fees are required to bake these days....its for safety.

 

rips

Billy the Poet's picture

Twinkies were gay from the get-go so no trouble with the LGBT crowd there.

RaceToTheBottom's picture

Outsource Innovative Financial Products.

Just run over the friggin CEOs

venturen's picture

now that democrats allow illegals to come and work for pitance....doesn't really help. I don't like lots of union tactics...but allowing unlimited illegals doesn't help anyone but the rich

TBT or not TBT's picture

It does bring joy in these dark days to hear that a union has been righteously crushed.   Faster, please.   

remain calm's picture

Fuck the unions. Everyone needs to learn how to fight for themselves. This why America is decaying, everyone wants a helping hand and then some.

Creepy A. Cracker's picture

The real concern here should be for the police (another unionized workforce).  Without Twinkies what will they eat?

i_call_you_my_base's picture

I'm against public sector unions, but having a private union is fighting for yourself.

Creepy A. Cracker's picture

In many cases it is, and was, asking for your job to be sent overseas.  "Tlinkies" will start arriving from China soon.

t0mmyBerg's picture

yeah and the cream filling will be laced with industrial chemicals.  eat one and you may live.  two or more and you are really tempting fate

Billy the Poet's picture

The "cream" filling is industrial chemicals.

i_call_you_my_base's picture

That's true of any job. If you push hard enough and demand increases your job will be given to someone else.