Class of 2020 | brali@wharton.upenn.edu

Twinkies have just made their comeback. Gores Holdings, Inc. has just completed its acquisition of Hostess Brands LLC, the makers of Twinkies, Ding Dongs, Ho Hos and other staples of the American culture. This marks the first time Hostess has been publicly traded since 2012. Gores, which has since renamed itself Hostess Brands, Inc. in spirit with its acquisition of Hostess, reported third quarter results in net revenue growth of 24% to $196.2 million and adjusted EBITDA growth of 36.7% YOY to $55.6 million. It also reported that in the past year, it has generated $620.8 million in revenue and $88.8 million in profit. Pretty impressive for a company that had previously filed for bankruptcy twice and was saved both times in 2004 and in 2011.

An understanding of why Hostess is enjoying this recent success requires a look at the company’s history in the past few years. In 2013, a large portion of Hostess was sold off to private equity firms, Metropoulos & Co. and Apollo Global Management, for $410 million. Since then, the two firms have invested $100 million in streamlining the production process. This has come in the form of centralizing food production, the introduction of direct-to-warehouse delivery, and mechanization--a process that has reduced the number of workers needed to produce the same output as before 2011 by two thirds. Furthermore, the company has doubled the shelf life of its preexisting products, gotten rid of its $1.3 billion in debt problems, and eliminated issues with union contracts and pension funds. As a result, the company has regained market share in the snack foods industry and even plans to continue growth through targeting distribution channels that it has historically lacked in presence (vending machines and dollar stores).

Fast forward to early July of 2016. Hostess Brands LLC announced its intent to become a publicly traded company on the NASDAQ. Through the increasingly popular avenue of using a publicly traded SPAC (special-purpose acquisition company), the company began the process of being acquired for $725 million by Gores Holdings, Inc., who contributed $375 million and raised $350 million from private investors. Investors expect that Hostess will have an initial EV of about $2.3 billion (a 10.4x multiple of the Hostess’ estimated adjusted EBITDA of $220 million). In regards to ownership of the company, Apollo and Metropoulos will still comprise a 42% stake in the company. Dean Metropoulos, the executive chairman and CEO of Dean Metropoulos & Company, will continue to serve on the board as the Executive Chairman and William Toler will continue to serve as the CEO.

So why does Hostess’ reemergence matter for us investors? Well, currently the U.S food industry’s profits are decreasing as consumers seek healthier and more natural items. The neatly packaged, high in sugar content foods that Americans once adored are now becoming dull to consumer taste buds. Big food companies have noticed this trend as well and have struggled to modify their foods to fit the changing consumer taste better.

The fact that these private equity firms and investors invested in Hostess and that the company has seen considerable profits since its reemergence is a signal that perhaps some unhealthy food items do not fit this trend. Furthermore, Hostess has shared its plans for venturing into frozen food items, representing an 11% growth in sales this year and an 8% growth in sales next year. As Alec Gore, the founder and chief executive of Gore Holdings, Inc. put it, “It’s an iconic brand, part of Americana.” The brand power of Hostess may just be too strong for anything to bring the company down, and investors should take note of this.