$59.99. That’s how much a box of Twinkies sold for in November of 2012, when the fate of Hostess Brands, the maker of the iconic snack food, seemed to be hurtling towards extinction. In 2013, along with Dean Metropoulos—a Greek businessman and investor with a track record in the food industry—Apollo bought the Hostess brand for $410 million, of which the two parties invested approximately $200 million of equity and raised debt for the remaining $210 million. Today, the company has a market value of $2.1 billion and is projected to have earnings of $235 million in 2017—up from a loss of $5 million in 2013.
Apollo and co-investors Metropoulos & Co and Gores Group (which brought Hostess to IPO late last year) recently announced that they would be cutting their stake in the business through a public offering. Apollo will cut its ownership to 2.6 percent, Metropoulos to 24.9 percent, and Gores will reduce its holdings to 12.8 percent. At $15.25 a share, the offering represents a 7.5% discount from the Hostess all-time high set in March of this year, and stays level with Apollo and Metropoulos’ return of 13x their cash investment.
Figure 2: Retail sales of natural and organic foods
The business turnaround of Hostess rested upon several factors; upon acquisition, Apollo and Metropoulos leveraged the classic Hostess brand, doubled product shelf life, and overhauled its expensive direct-to-store delivery system to return the company to profitability. Most importantly though, the owners renegotiated labor contracts and trimmed operations—reducing the workforce by nearly 85%—to cut costs and increase efficiencies. Consider the fact that an automated production line staffed by 10 workers in Emporia, Kansas, produces 95 percent of America’s Twinkies. The initial rumors are true; it is not illegal workers, or China, or regulatory law that is keeping jobs out of the hands of US workers. It is automation, which makes it even more difficult to buy into the President’s promise to ‘create a manufacturing boom’ in this country. Bluster can win elections, we have seen, but it certainly cannot create jobs.
What is also interesting to consider is the changing tastes of the American consumer and the food landscape; healthier foods are more popular than ever and the shunning of salty, sweet, and fatty foods has never been more vocal or prominent. And yet—sales of Twinkies and other Hostess snacks are up 13% in the past year. For Apollo, the Twinkie craze has certainly proved to be a profitable one. But in the greater picture, how much longer will Hostess be able to sustain its growth? The healthy-foods market, for lack of a better term, has been growing at an annual rate of nearly 6% in the US—outpacing the entire food and beverage market and is globally expected to cross the $1 trillion mark this year. Coupled with growing consumer disenchantment with fast food and traditional snack foods, the viability of a brand like Hostess—that relies entirely on fattening, sugary sweets for its business, is questionable. Time will tell whether Hostess can continue to prevail in a changing market or will wind up back where it was when Apollo picked it up.