Resolving Issues and Determining Gores Shares: Case Study on Hostess Brands

Question 1: Issues to Resolve

What are the issues you had to resolve to come up with your answer?

How many Gores shares should Metropoulos & Apollo demand?

Using Exhibit 3 in the case write-up as a benchmark, the value of Hostess equity in 2016 could have been anywhere from $1,127M to $1,752M, assuming a range of 11-14x EBITDA multiples. Gores agreed to pay $522M in cash to Hostess shareholders (Metropoulos & Apollo), with the balance paid in Gores shares.

If you have never eaten a Twinkie, you don’t need to start now. Twinkies don’t show up on the government’s recommended nutrition list, but they are pretty popular in large parts of the country.12 It is a beloved snack among an older generation of Americans, particularly in rural areas, and you can imagine how distressed some people were in 2013 to hear that the company that made Twinkies was shutting down, and their favorite pastry treat would soon disappear from the local grocery store shelf. Surely someone would come along and figure out how to save the Twinkie! Bankruptcy.

Interstate Bakeries Corporation, the company that made Twinkies and was later renamed Hostess Brands, went into bankruptcy the first time in 2008. Hostess came out of bankruptcy in 2009, backed by a private equity firm, Ripplewood. Unfortunately, by January 2012, the company had to file for bankruptcy once again. With 19,000 employees, most of whom belonged to either the Teamsters or Bakers Union, the problem Hostess could not overcome were its labor contracts – high wages, significant pension obligations, and work rules that limited its ability to consolidate facilities or distribute products efficiently to many locations.13 At some point in 2012, after Hostess was unable to reach agreement with the Bakers Union, the bankruptcy court allowed the company to impose a new labor contract that included a number of concessions.

The Bakers Union went on strike to protest the contract, causing a number of baking facilities to close. Hostess ran out of money and was forced into liquidation. In liquidation, a debtor has a fire sale of all of its assets to avoid further financial drain and salvage as much money as possible for its creditors. For a period of time, at least temporarily, Hostess had to shut down and Twinkies were no long available in grocery stores. Most of the company’s employees were laid off. Liquidation. In a sale of assets in liquidation, a bankrupt company’s investment banking advisor will typically solicit bidders on an expedited basis and negotiate a stalking horse bid with one of them. The stalking horse bidder is then committed to buy the assets at a certain price, but has to agree there will be a formal auction on a certain date a few weeks later to fetch a higher price if possible. If another bidder comes in with a higher price in the formal auction, the stalking horse bidder earns a breakup fee.

If not, the stalking horse bidder completes the sale. Once the sale is approved by the bankruptcy court, the assets are transferred to the buyer free & clear of any debt claims and written up to the purchase price for tax purposes. So in 2012, Hostess, the company that made Twinkies, was put up for sale in a bankruptcy liquidation auction. Dean Metropoulos had an interest in buying it. He is a private equity,