$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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A Nanny Moose's picture

No it is not. Joining a union is simply joining hands with the two Corporate wolves that are going to eating you for dinner.

ATM's picture

Who exaclty does a public union collectively bargain with?

They don't bargain with a stakeholder like unions do when bargaining with a private or public company. They bargain with peole who have no skin in the game and in fact have a vested interest in giving the union everything it seeks in return for endorsements, money and votes.

It's a sick, twisted system.

yellowsub's picture

What do you expect from the same populace that got brainwashed inthe public education system controlled by unions...

You think the make decisions on the best interest of your children's education?  

shovelhead's picture

Actually it's hiring a hit man to do your killing for you.

froze25's picture

Everyone but the rising Do it yourselfers known as "preppers".  The hobby of "prepping" is a funny one because some of the people that are doing it have great jobs and are now bank rolling since they are not shopping for shit but if anything turning their property into a self sustaining fortress.  No helping hand needed, none wanted.  No to mention that they are in some cases turning a positive cash flow from ordinary residential properties while still employed full time.  No wonder the establishment hates them.

shovelhead's picture

I rent my basement out to 22 illegal aliens.

Hopeless for Change's picture

Gekko would swoon over this deal.  

 

Blue Horseshoe loves Twinkies.

CuriousPasserby's picture

Some unions need to be crushed.

Bastiat's picture

Some corporations need to be crushed--in fact the corporation, as such, needs to be crushed.  https://search.yahoo.com/yhs/search?p=the+corporation+movie&ei=UTF-8&hsp...

markpower49's picture

Unions use the threat of gov't violence to obtain leverage over owners, customers and taxpayers.

 Unions are evil.

venturen's picture

and illegal invited by democrats are good for wages?

Row Well Number 41's picture

Corporations use the threat of gov't violence to obtain leverage over owners, customers and taxpayers.

Corporations are evil.

 

#41

Jumbotron's picture

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

 

Cool.....now they can continue to push out cream filled death to the useless eaters on EBT.  Just what our broken health care system needs.  Hey....but somebody's profiting....so it's ALL good.


 

steelhead23's picture

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

Let us be perfectly clear here.  Parasites extract sucor from their hosts.  The parasite in this little parable is Apollo.  The workers at Hostess, their victims.

The_Dude's picture

How soon till the next bankruptsy? 

A_latvian's picture

And all they had to do was pick up the carcass of a company which did nothing more than crush its unions.

Or, a non slated way of saying it might be that the cancer of the unions killed the company, which was brought back to life by investors who risked THEIR OWN MONEY only after the cancer was removed.

Spin... spin... spin.


thamnosma's picture

That's a bit simplistic.  No doubt the union caused the problem for the initial owners.  These "billionairs" are using bankster debt instruments to massively enrich themselves, not build up the company.  They are far worse parasites than the unions, who I have little love for.

mkkby's picture

You just outed yourself as a socialist.  What is the point of buying a company?  Making money FOR YOURSELF is the ONLY REASON.

"Build the company" is just another way of saying, pay taxes, or be a nanny to your workers.  You might as well paint your face black and call yourself obama.  If you think rich guys owe something to poor folk, go fuck yourself and pick up that ebt card and obama phone.

SMG's picture

The officer of every corporation should feel in his heart – in his very soul – that he is responsible, not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States.

– Adolphus Green, founder, Nabisco

Naw but your idea of I'm going to get what's mine and screw everbody else is what we need more of in our society.  I mean its working so well right now isn't it?

 

Henry Rearden's picture

Simply put, if the Unions did fuck themselves and gave into demand earlier they wouldn't have been flushed away.

  Nice negotiating.

beercandad's picture

Unions don't negotiate ,they demand .

A_latvian's picture

Public sector unions don't negotiate, they take hostages.

Private sector unions can be tolerated (though not at my business), public sector unions are traitorous and should be outlawed.

falconflight's picture

Thank JFK for the public unions.  

ElixirMixer's picture

They gave in to management the first time it went bankrupt in 2009. Obviously that worked out well for them. 

Contracts work both ways.

Tyler Durden's picture

That is not incorrect.

However, by getting repaid for their "risk" (a debatable concept under ZIRP) with leverage that will assure the bankruptcy of the company yet again, this time the "investors" guarantee that thousands of non-unionized workers will soon be out of a job too.

As for the blame game, read the end of the post.

samsara's picture

Thank you Tyler for pointing out the Huge investment risk those BILLIONAIRES took.  (Thanks for the Money ZIRP).....

divingengineer's picture

Sounds like Credit Suisse is taking all the risk to me.  Not the a-holes who put the deal together, they get paid on the front end of the deal.  

Imagery's picture

And exactly where do you think Credit Suisse gets "its" monies to "take all the risk"?  They fucking print it up from thin air or less, just enter a few digits against the US Taxpayers' accounts.

mkkby's picture

The non unionized workers are at no risk so long as people buy the product.  If there is a second bankruptcy due to the debt, that debt will be discharged and the company can be re-born again.  So it is the debt holders who are at risk, not the employees.

Augustus's picture

Tyler Durden:

However, by getting repaid for their "risk" (a debatable concept under ZIRP) with leverage that will assure the bankruptcy of the company yet again, this time the "investors" guarantee that thousands of non-unionized workers will soon be out of a job too.

 

Of course you are entitled to your opinion on the probability of another bankruptcy. 

My experience is that no group of bankers lends money to an enity which is certainly going bankrupt.  Maybe they had information about thecompany that is not available to you?

 

 

J Pancreas's picture

Thats what all these morons on ZH who are bitter and living in a basement dont understand; someone could have lost their bet and been out millions. Too many people on here rail against big business and investors yet do nothing to improve their own lot in life. This article is severely biased in its commentary. Such crap like this wouldnt even have been posted on ZH five years ago.

thamnosma's picture

There simply aren't enough private security guards to protect these fuckers if the population ever turns on them.

froze25's picture

How does the quote go? "we are your cooks, your drivers, your landscapers, we guard you while you sleep.  Don't fuck with us."

ted41776's picture

unions killed a US company, and now it has been moved to Mexico and brought back to life... great job! is this how we're going to "compete" in the global economy? taking out more college loans will fix everything!

The Delicate Genius's picture
The Delicate Genius (not verified) ted41776 Jul 22, 2015 1:15 PM

unions didnt kill that company, though.

Pickleton's picture

Well, he is the imbecile that diagnosed America's problems (at least in part) as the religious people.  Meh, he offers a simpleton's analysis.

The Delicate Genius's picture
The Delicate Genius (not verified) Pickleton Jul 22, 2015 1:33 PM

if you think only an "imbecile" would believe part of America's problems are religious zealots - you are an imbecile.

and, I'll venture to guess - a bit of a cunt.

The Delicate Genius's picture
The Delicate Genius (not verified) ted41776 Jul 22, 2015 1:46 PM

'why are you spreading lies' says the guy who links to CNN.

did you read the fucking article you linked to, and have you read anything else, you contemptible scoundrel?

The Delicate Genius's picture
The Delicate Genius (not verified) The Delicate Genius Jul 22, 2015 1:35 PM

lots o' junks as expected - anything that deviates from the "unions are bad/I just read Ayn Rand and need read nothing else" script will get that...

but 15 minutes on the intertubes reading about it should disabuse you of the notion that eeevil and greedy workers demanding "wages" or "benefits" tanked that company.

Years of mismanagement, by a very overpaid management, killed that company.

So, in essence, go fuck yourselves. I wipe dogma off my shoe - I don't roll around in it.

mkkby's picture

Sorry Mr. Socialist.  You are not special.  The mexican or chinese guy can turn a screw and not demand $30 an hour, plus $20 an hour in benefits.  Get yourself a decent skill or start your own business.  Quit demanding someone else take care of you.

farflungstar's picture

Spoken like a true AmeriKa hating, transnational capitalist A-hole. Lemme guess, you also believe hard work is it's own reward too? 

Working-class people, stroked and pumped up when the country had to be built up - the USSR and the left who worshipped the so-called worker's paradise had to be discredited - now the money-class and money changers throw them away like garbage for the cheap illegal mestizos or the slave economy chinks.

Nice economy you and your ilk created and pimp for. I hope that was your soup I pissed in last week.

 

falconflight's picture

 I hope that was your soup I pissed in last week.

Truely spoken like a member of the Worker's Class.  Let's just cut out the middleman, open wide. ;0

New_Meat's picture

I do so much like to watch the trannie tag-team thingie goin' on.

{farflung and the oh-so-delicate thang, please, please, please don't let Mrs_Meat that I'm a'watchin' u 2 go}.

Lovingly,

- Ned

FredFlintstone's picture

A big problem was the war on poverty and all of its misguided efforts created a horde of useless folks who will keep on breeding and consuming without producing until they suffocate us all.

KnuckleDragger-X's picture

Don't give a shit, I don't eat Twinkie's and don't belong to a union. If they want to have a money circle jerk, more power to them.....

The Delicate Genius's picture
The Delicate Genius (not verified) Jul 22, 2015 1:16 PM

everything they make - is shit.