$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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vq1's picture

Walker, ALEC, Right-to-Work. Union membership crushed. Wages stagnant. 

 

But some arent dead yet. JFK, LGA workers to strike starting today. Power to labor. Collective bargaining to fight inequality. 

Augustus's picture

f I recall correctly, the comany reached agreemets with al unions ecept one.  That bag of idiots were told that the altenative was bankruptcy an no jobs for them.  Through collecive brgaining that union voted for getting new jobs elsewhere. I believe the sticking point as not wages but pension plan funding.  In an case, I'm sure those workers are now doing great in their new jobs.  Union members are a smart bunch who just won't accept wage rates lower than what they are really worth.

Seasmoke's picture

Buy a subprime automobile for 7 years and get a box of Twinkies

khakuda's picture

Great!  Can't wait to hear Janet Yellen opine again about how she is apalled that the rich keep getting richer while the poor get poorer as she continues to pour free money into the system to further exacerbate the wealth divide.  Her lack of understanding for how the game works would be comical if it weren't so sad for those negatively impacted.

replaceme's picture

If she believes a single word of what she says.

khakuda's picture

True.  They tend to lie a lot.  A whole lot.

aardvarkk's picture

And tomorrow we'll hear about a greedy bunch of squintillionaires who made 1000% of their profits off of the backs of orphans.  Jeesuz, do you people ever stop to think that things might not be as cut-and-dried as they look?  Mother of fuck, how stupid.  Some guys made a lucky bet.  That's all there is to see here.

aardvarkk's picture

You know, it COULD be that I'm just getting a bit jaded from reading all this doom crap.  Maybe I should just log off for a while.  This same article could have been written in 2007.

monad's picture

No we won't hear about it, because the squintillionaires control all the media. They have been astroturfing the internet on overdrive all year in order to get universal censorship laws passed. The mess is nigh.

Pickleton's picture

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

 

Why specifically point to lack of unionization since being unionized didn't do shit for them in the first place?

To Hell In A Handbasket's picture

Crush the Pinko-Commie unions. Fuck workers rights. We don't need them here in the good ole U S of A. That is until my job is on the line, then unions are good. Oh well, a job a Wal-Mart beckons.

samsara's picture

Another success story,   Unions crushed and $500 million given to the the billionairs who deserve it.

 

 

firstdivision's picture

As much as I do not like unions, the sad part is, they are needed again like in the distant past.  Most jobs in this country do not pay enough to afford rent in a shitty part of town, food, gas, utilties, and bus passes.  We blame the unions, yet companies and executives are reaping record rewards. 

astoriajoe's picture

Why didn't the union buy the company?

InflammatoryResponse's picture

simple, they'd have had to put skin in the game. face some accountability, etc.

 

no dice,  far easier to blame the man in the suit.

 

than the guy in the hairnet next to you mixing dough.

 

and yes I made creme filled snack cakes as a kid.

 

astoriajoe's picture

I hope these unions, especially their members, take a good hard look at who is managing and holding custody of the stocks/bonds/currency/magic digits for whatever retirement funds they've accumulated on behalf of their members.

PoasterToaster's picture
PoasterToaster (not verified) Jul 22, 2015 1:31 PM

We've had 40 years of unrecognized inflation and it is crushing everyone.  This divide and conquer view about unions and billionaires doesn't get to the root of the problem.

Raoul_Luke's picture

The fact is if they didn't get rid of the unions they would have gone out of business and then there'd be no jobs for anybody.

MR166's picture

That was going to be my next point.  The unions screwed the workers not the executives.

22winmag's picture

It would be nice if police unions were "gotten rid of" too.

 

They spend a lot of time and money covering up murders and crimes committed by their members.

detached.amusement's picture

The fact is, the currency has been ruined, and they would have been up shit's creek with or without the unions.

MR166's picture

So all they did is crush the labor unions eh!  If that was the case and the unions are so innocent why did the company go bankrupt in the first place?  Nope, it was the unions that shut down the place and they should suffer the consequences!!!!!

Bemused Observer's picture

Then without them, Hostess ought to take off like there's no tomorrow, right?
If they don't, then your theory shall be proven wrong.

MR166's picture

Nope, as the article stated, Hostess II has just been saddled with unconscionable debt courtesy of the Ponzi scheme also known as The Federal Reserve.  Most likely pension funds will take the hit this time.  They are so desperate for yield that they don't really care what happens 2 years from now.

joseJimenez's picture

I don't see the unions as heros either.  They have caused their share of the problem.  The way I see it there are no good guys here

CerpherJoe's picture

Tyler - say it ain't so ... you've gone so left on us.

Tyler Durden's picture

Last time we checked, the "left" adores this man:

 

If confused, reread this line: "blame the Fed whose 7 years of ZIRP has made this kind of asset strip-mining not only possible but an acceptable, daily occurrence. "

shovelhead's picture

Dammit.

Respect the man.

He saved us all from certain DOOM!

The Atlantic says so.

samsara's picture

Tyler tell him about Hertz and RJR  and how to destroy a company and walk away with millions.

Atomizer's picture

A hero who's turned into Zero. 

Otrader's picture

THE HERO by Roger Lowenstein.  Oy

BGO's picture

All that free dough and the company STILL hasn't brought back motherfucking Suzy Qs?

Jack Burton's picture

Fact is that labor unions are dead. The forces arrayed against orgainized labor are simply too powerful. All across Europe, the individual contract is replacing a labor union contract. It is simply you and the employer. If you want the job, accept the labor terms in your contract. If you feel valuable to the company, then negotiate better terms. If they need you, they will negotiate, if 100 others have their applications sitting on the bosses desk, you better take the terms. In Britain, in order to get employment, hundreds of thousands of people are signing Zero Hours Contracts. This makes you an "on call" employee. You only work when called in, your hours are not guaranteed in any sense. The fact that workers accept these terms shows two things. The desperation of people for a job. The power of the employer to impose terms and find thousands will to accept them. This stated samll in the UK, but has bloomed into a near standard employment contract.

I once worked like that. I was hired, I had zero hours guarnateed. I worked when scheduled or when called. If you have ever done this, you will know the meaning of the words "it sucks". Mind you, this job payed a very hefty hourly wage, near the top of scale for non-managers. Still, if you work 5 hours a week, you are fucked. The rare week of 40 hours was damn nice! But in the UK we are talking low wage even minimum wage zero hour contracts.

That simply shows Uinons are dead. The EU is working to end Unions, just as the USA did. Only the public employees are holding onto bug pay and top benefits. I wonder when their day will come?

The Delicate Genius's picture
The Delicate Genius (not verified) Jack Burton Jul 22, 2015 1:47 PM

who needs unions when you can get an h1B visa?

monad's picture

Unions have been controlled opposition for my entire life. I have seen managers move from management to union management jobs and still report to the same dicks every day. Bought and paid for. The revolving door next to the Statist nanny policy enforcement machine & blood stained suggestion box.

The h1b might get you a job at 20% below rate, but you'll work all the time. Safer inside the building than out amongst the truly desperate, living dead. Stay away from the windows, man.

Gotcha!

Kayman's picture

Central Banking killed Unions.  Actually Central Banking has killed all jobs.  When a company can get money at Zero cost, the classic trade-off between Capital and Labor is tipped entirely in the favor of Capital.

That is, it becomes infinitely more profitable to replace labor with equipment, computers, etc.

Part of the plan to take us back to the Feudal ages.

Rikky's picture

True story talking to a private equity guy who said his company was offered to buy a $280 million company purchased by another PE firm in 2007 for $6 million in 2009.  At the time it was worth maybe $60 million.  The other PE firm was selling off other assets as well for pennies on the dollar.  He didn't know why until a few months ago when a lawyer who was involved in these deals told him that if the firm sold off 'unprofitable' entities they invested in for pennies on the dollar between 2007 and late 2008 they would meet criteria to get back 80% of the original purchase price from TARP.  This is how these scumbag crooks basically steal money from investors and taxpayers.

 

Downtoolong's picture

What kind of financial advisor and manager of other people’s money uses it to mostly pay comp to insiders and existing shareholders, with only a fraction actually going to finance a company that no one else wanted to buy??? I smell a big kickback payment in this deal somewhere. The billionaire owners aren’t the only ones getting rich off it.

Atomizer's picture

Union was shot down with a Sara Lee knock off. It's sold on Amazon. Twinkle drone drop off 

Amazon.com: Sara Lee Golden Creme Cakes 12.1oz (8 Wrapped ...

youngman's picture

There is money in them thar Twinkies eyes tell ya...

gwar5's picture

Fuck those union thugs, they killed Twinkie!

It's worth 2 billion to bring him back to life, for the children. Buying a Twinkies on the way home from school is a tradition.

Catullus's picture

It's a bond Deal only CALPERS could love.

Gold N Glocks's picture

Anyone out to crush unions is A-OK in my book.

Atomizer's picture

I loathe unions, but someone is stealing intellectual property rights. That's why I don't release new technology. Let the snake eat it's own tail. 

DutchBoy2015's picture
DutchBoy2015 (not verified) Gold N Glocks Jul 22, 2015 3:11 PM

you deserve to starve