$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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Caleb Abell's picture

"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."

 

So what?

This is free market capitalism.  The only ones who really matter are the billionaire investors.  The workers, along with their wives and pathetic mongrel children can all die from hunger in the gutter.  Just don't do it in front of the factory, because the stockholders don't deserve to bear the expense of cleaning up the mess.

reader2010's picture

The irony is that even with your fabulous iPhones and other Internet devices giving you tons of astronomical amount of information at your figure tips,  the same ol class struggles between the halves and the have-nots remain shockingly the same as once they were throughout the 19th century,  even with the same outcome,  not so surprisingly.  Those who naively believe the information and technology would change the world for better are total idiots. 

Let me quote Neil Postman here. 

"What causes us the most misery and pain - at both cultural and personal levels - has nothing to do with the sort of information made accessible by computers. The computer and its information cannot answer any of the fundamental questions we need to address to make our lives more meaningful and humane. The computer cannot provide an organizing moral framework. It cannot tell us what questions are worth asking. It cannot provide a means of understanding why we are here or why we fight each other or why decency eludes us so often, especially when we need it the most. The computer is, in a sense, a magnificent toy that distracts us from facing what we most needed to confront - spiritual emptiness, knowledge of ourselves, usable conceptions of the past and future."

— Neil Postman, Informing Ourselves to Death, 1990

shovelhead's picture

Who the fuck is that idiot?

Someone was expecting "spiritual fulfillment" from a computer?

Jesus wept.

monad's picture

Not an idiot. Some kid bitching about being coerced to pay for other people's transhuman surgery when he saw it on his tax bill. He was awake.

Fahque Imuhnutjahb's picture

OK, maybe I should try to force a leveraged buyout of Hostess once they discharge their current debts through the next bankruptcy; then I can cozy up to some bankers who can loan me some "capital", FDIC backed of

course.Damn this has been so much work!, I need to be remunerated, so I'll go ahead and pay myself a deserved bonus!  Oh shit! annnd it's gone!  Well, guess I should just file for bankruptcy, once that is resolved I

can cozy up to some bankers who can loan me some "capital"..............

RabbitOne's picture

Hostess union crushers, billionaire buyout experts and union wage scalpers make for the same story – hedonistic money pursuit. This has always been part of all capitalistic systems - now it is the norm of capitalism.

 Back before the current godless era some businesses and unions had a moral base. It was not uncommon in those days for companies and unions (not public unions) to act on other than greed where the management, workers and shareholders all got a reasonable size piece of the profit pie. This way you didn’t “kill the goose that lays the gold egg”.

Now it is a completion to see who gets the most without choking the company to death.  Many ignore the warning and do choke the company to death with a “…I’m getting mine first attitude…”. It’s a sad commentary on today’s business…

Atomizer's picture

Apple can sell iCreame to fill Tim Cooks Twinke asshole via Apple Pay. If you want to watch Tim Cook get a twinke shoved up his ass, subscribe to Apple TV. 

cigarEngineer's picture

Your rage against rich people betrays your ignorance. Companies lever up because of tax benefits for debt. Thank the politicians and the people who vote for them.

Don't blame the smartest guys in the room who follow all the rules.

Atomizer's picture

Most rich people don't own debt. We pay taxes to front run your free shit illusion. You get a refund, we pay for that IRS email scandal. Lois (purged government email servers) Learner.

Do you need a link to reactivate your EBT Card? This story is about to blow wide open. Maybe you can contact Planned Parenthood to buy a set of baby back ribs. 

monad's picture

Thank you, politicians. Please thank the people who bought you, as I don't know how to reach them.

chosen's picture

I used to like Hostess cupcakes, but they changed the recipe about ten years ago so I quit eating them.  I never liked Twinkies.

DutchBoy2015's picture
DutchBoy2015 (not verified) chosen Jul 22, 2015 4:08 PM

I won't eat anything that doesn't spoil for 5 years.

DutchBoy2015's picture
DutchBoy2015 (not verified) DutchBoy2015 Jul 22, 2015 4:55 PM

You can see by the down votes there are a lot of shit eaters here.

DFCtomm's picture

You know that the more you comment the more people are convinced to agree with you. I think you need to double or triple your output. Foul language and insults also poll high, so you need to turn that dial up to 11 as well.

falconflight's picture

It's in the Douche DNA...an off shoot of their german cuzins

DutchBoy2015's picture
DutchBoy2015 (not verified) chosen Jul 22, 2015 4:10 PM

Interested in a Big Mac I have had in the closet for 9 months?  No sign of spoilage.

Or how about some fries I dug out under my car seat.   Fresh as a daisy

wendigo's picture
wendigo (not verified) DutchBoy2015 Jul 22, 2015 6:23 PM

Shithead, wheat and rice don't spoil for years, are they on the blacklist too? Dried beans, those also bad? 

aldousd's picture

Score! Finally some good news.

flysofree's picture

Kudos to ZH for writing such an article and clearly pointing out how such a DEAL was made possible. To those that say 'f the unions', you are ignorant of the fact that it's the like of you who will ultimately pay for this deal; that's enriching private equity scammers, at YOUR expense.

When Hostess goes bust from all this debt, it's the taxpayers, retirees and investors who will pay. Perhaps its your own township or public utility that bought Hostess paper?

MR166's picture

Look the unions and first bankruptcy are a totally separate issue from today's happenings.  Undoubtedly public and private pensions will buy this crap and they are partly to blame for this fraud.  They are not innocent bystanders but partners in this crime.  Basically you can chalk this up to declining morals in the country as a whole.  Anything goes just as long as they don't convict you of a crime.

foodstampbarry's picture

End the Fed, secure the border and you wouldn't need unions.

fightapathy's picture

WFT are Twinkies made of, if they can be warehoused instead of delivered? Hint: Its surea ain't anything we're supposed to eat!

To Hell In A Handbasket's picture

I thought all posters on ZH, were financially savvy, but it appears not. FFS, stop believing the Wall Street-City Of London propaganda, portraying Private Equity firms as innovative, have great management skills and brains. No they are not. Some are really smart, but the majority simply work for an entity that has access to money and lots of it. Warren Buffet was the original asset stripper and those following in his footsteps, simply copied his methods. No management skills in the world can turn around a company in such a short time and suck $900 million out of a company without loading it up with debt to its eyeballs. It's fucking impossible.

 

 What you are witnessing is classic dividend extraction, on the back of debt (ALL LEGAL). Just wait and see who picks up the final tab. This shit goes on in England too and its only been in the last year, that the middle classes are slowly waking up and realising what is going on as the PHONES-4-U scandal made it plain to see.  

http://www.telegraph.co.uk/men/thinking-man/11109845/Why-arent-the-Briti...

AAA21's picture

I didn't realize Tyler Durden had turned into an unabashed Socialist!  No doubt Billionaires are using the Fed's immoral and fraudulent monetary policy to take on deals that they otherwise could not.  However, Hostess was destroyed by their parasitic unions, and that isn't the fault of any Billionaire - they just picked up the pieces afterwards!

The Delicate Genius's picture
The Delicate Genius (not verified) AAA21 Jul 22, 2015 4:01 PM

you keep using that word, "socialist."

I do not think...

etc.

Fahque Imuhnutjahb's picture

Did we read the same ZH posting?  I can tentatively agree, but they picked up a shit load of pieces and stuffed them in their pockets, staging the next bankruptcy.  Just because a course of action is legal doesn't

presuppose it is right.  Hell, I wondered why I wasn't a billionaire!  Partly because I try to do the right thing, but mostly because I spend too much time on the internet.  Oh well.

Hammer's picture

Clearly debt is being abused.  But unions across companies are a root problem.  Don't fool yourselves.

 

rejected's picture

And our children will thank you when they are working for $10 a day, no benefits, no safety requirements.

Hey,,, they'll have a job.... right!

p00k1e's picture

It's for the children??    Unions are for the children??  LOL 

DutchBoy2015's picture
DutchBoy2015 (not verified) rejected Jul 22, 2015 4:43 PM

They don't get it and never will.  Their brains are MUSH.

Hammer's picture

Clearly debt is being abused.  But unions across companies are a root problem.  Don't fool yourselves.

 

DutchBoy2015's picture
DutchBoy2015 (not verified) Hammer Jul 22, 2015 4:15 PM

What a sorry bunch of slaves.  Stockholm Syndrome idiots.

DutchBoy2015's picture
DutchBoy2015 (not verified) Jul 22, 2015 4:07 PM

People who bash unions deserve to be raped by companies paying them 2 bucks and hour and work 80 hours  a week.

shovelhead's picture

Well, we all can't work for international terrorists and airline bombers.

DutchBoy2015's picture
DutchBoy2015 (not verified) shovelhead Jul 22, 2015 4:22 PM

What a fucking idiotic thing to say.  You believe the LIES of the US govt.   Ghaddaffi didn't bomb anyone you goddam IMBECILE.

You are a true fucking retard ,  go crawl back into your 8x40 single wide , Jethro.  Don't forget to brush your tooth.

DutchBoy2015's picture
DutchBoy2015 (not verified) shovelhead Jul 22, 2015 4:24 PM

Hey asswipe, your country is the biggest purveyour of state sponsored terrorism on earth

Go upstairs, kid , your momma says ''Milk and cookies''

doc333's picture

Fck the unions... they were a beautiful thing in the 1st half of the the 20th century... now they are just gimme, gimme PARASITES

DutchBoy2015's picture
DutchBoy2015 (not verified) doc333 Jul 22, 2015 4:17 PM

Not in my country,   virtually everyone is a member of a union here, housewives, unemployed etc

We have 2 main ones.  If our elected govt tries to fuck us citizens we shut down the country,

Divided you FALL , United we Stand.

You are a sad lot of divided people.

Thats why you are going down the tubes.

shovelhead's picture

You a member of the Muzzies in Wonderland Union?

DutchBoy2015's picture
DutchBoy2015 (not verified) shovelhead Jul 22, 2015 4:25 PM

I told you to crawl back into your shitty trailer you fucking wanker!!

You don't know shit from shinola about the real world.  Just parrot the propaganda fed you,  

DutchBoy2015's picture
DutchBoy2015 (not verified) shovelhead Jul 22, 2015 4:25 PM

I told you to crawl back into your shitty trailer you fucking wanker!!

You don't know shit from shinola about the real world.  Just parrot the propaganda fed you,  

MR166's picture

" virtually everyone is a member of a union here, housewives, unemployed etc"

 

When an unemployed person goes on strike does he start working?

DutchBoy2015's picture
DutchBoy2015 (not verified) MR166 Jul 22, 2015 5:45 PM

You don't understand unions at all.  It means shutting downt the country by everyone NOT doing a THING.

Jesus fucking Christ you Americns are such retards. Try using your fucking brain instead of popping meds.

MrSteve's picture

As a most elementary point of fact, EVERYBODY KNOWS American ends in I CAN ! exclamation mark is optional...

Aaaand we think your paint and cute hair cut are just fine.

DutchBoy2015's picture
DutchBoy2015 (not verified) MrSteve Jul 23, 2015 5:07 AM

American't and is proven daily. 

You are a clueless fucktard who should go visit a really modern up to date country.

 

DutchBoy2015's picture
DutchBoy2015 (not verified) MrSteve Jul 23, 2015 5:07 AM

American't and is proven daily. 

You are a clueless fucktard who should go visit a really modern up to date country.

 

DutchBoy2015's picture
DutchBoy2015 (not verified) MR166 Jul 22, 2015 5:45 PM

You don't understand unions at all.  It means shutting downt the country by everyone NOT doing a THING.

Jesus fucking Christ you Americns are such retards. Try using your fucking brain instead of popping meds.

DutchBoy2015's picture
DutchBoy2015 (not verified) MR166 Jul 22, 2015 5:45 PM

You don't understand unions at all.  It means shutting downt the country by everyone NOT doing a THING.

Jesus fucking Christ you Americns are such retards. Try using your fucking brain instead of popping meds.

dexter_morgan's picture

who gives a fuck about your country anyways - if its so great go enjoy it instead of trying to spread your bullshit here.