Important Hostess Brands insights in Perella analysis
Jan. 22, 2013
Insight into the current status of the Hostess Brands bread business and the challenge facing the buyer of those assets may be gleaned from analysis by the investment banker handling the transaction. Joshua S. Scherer, in a sworn affidavit submitted to the bankruptcy court, described a robust process conducted by his firm Perella Weinberg Partners leading to a stalking horse bid by Flowers Foods, Inc.
Following contacts with 171 potential bidders for the Hostess Brands assets, confidentiality agreements were executed with 88 parties, Mr. Scherer said. By the time the bid deadline of Dec. 10 was reached, P.W.P. had received 13 bids for the Hostess bread assets, 10 for the cake assets and 1 for basically all the assets. Mr. Scherer said the single bid for all the assets had a number of drawbacks, including a purchase price lower than Flowers’ bid for the bread assets alone. Mr. Scherer cited a number of reasons the Flowers’ bid was selected.
“There are no other indications of interest that would allow the debtors to sell as many bread brands (and related assets) as does the package proposed by the buyer,” Mr. Scherer said.
His analysis implies that, based on the $360 million agreement price, the annual bread sales estimate for the bread business is $900 million. He described the price as a “fair revenue multiple at the lower end of revenue multiples for non-distressed ‘going concern’ precedent transactions as well as a discount for the cash costs and investments required to restart production, re-invest in the brands and recapitalize the debtors’ aged fixed assets.”
In emphasizing the need to complete this sale quickly, Mr. Scherer also shed light on the damage inflicted on the business by the bakery worker strike that prevented the sale of the bread business as a going concern. Stating “time is of the essence,” Mr. Scherer said delays in the sale would result in diminished value.
“The longer Hostess’ bread products stay off the shelves (because they are no longer being manufactured), the more likely it is that consumers will begin to use competitors’ products,” he said. “Indeed, bread is an everyday staple consumer food product that is highly substitutable. In fact, store shelf space formerly occupied by Hostess bread products has already been reallocated to other vendors. Any purchaser of the bread business assets will need to re-negotiate supply terms and shelf space arrangements with former customers. As customers begin to use competitor products, it will become more difficult and expensive for a purchaser of the bread business assets to negotiate new shelf space.”