McKee named stalking horse bidder for Drake’s

by Josh Sosland
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KANSAS CITY – Hostess Brands, Inc., on Jan. 28 said it has selected McKee Foods Corp., Collegedale, Tenn., as the stalking horse bidder for the Drake’s snack cake business of Hostess.

Under the agreement, McKee Foods, the maker of Little Debbie snack cakes, would pay $27.5 million in cash for Drake’s and would assume certain liabilities. Not included in the transaction are any production or other facilities, including the Hostess plant in Wayne, N.J., where Drake’s snack cakes had been baked.

“These agreements once again set a strong value for our businesses and we look forward to conducting an auction process that will further enhance the return for Hostess's stakeholders," said Gregory F. Rayburn, chairman and chief executive officer of Hostess Brands. “The contemplated purchase prices for Drake's and the four bread brands, together with our previous announced stalking horse bid for the majority of our bread business, means we have agreements to sell these assets for at least $440 million.

“We expect that figure to significantly increase once we announce a stalking horse bidder for the majority of our snack cake business, including Twinkies.”

In documents filed Jan. 28 with the U.S. Bankruptcy Court, Southern District of New York, Irving, Texas-based Hostess sought court approval for a March 15 auction of the Drake’s business and a March 19 hearing to approve the winning bid, free and clear of liens, claims, interests and other encumbrances.

In the filing, Hostess also sought approval of McKee as the stalking horse bidder in the transaction.

As part of the purchase agreement McKee would be entitled to a breakup fee of $687,500 million in the event another buyer prevails. Additionally, McKee has made a good faith deposit of $1,375,000 and other bidders similarly will be required to make a 5% deposit before the start of the auction.

Additionally, in acquiring the Drake’s brand, McKee would not be subject to successor liability claims including pension plans, multi-employer pension plans or collective bargaining agreements.

“In light of the substantial claims that could be asserted (however erroneously), the buyer has required these findings and provisions as an essential component of its offer to purchase the Drake’s brand,” the filing said.

Hostess described Drake’s as one of its “major cake-related brands,” with snack cakes sold under the Coffee Cakes, Devil Dogs, Funny Bones, Ring Dings, Sunny Doodles, Yankee Doodles and Yodels  names. With sales centered in the Northeast, Drake’s core markets include New York; Philadelphia; Boston; Hartford, Conn.; Washington; and Baltimore.

Included in the purchase agreement are 24 recipes, 12 U.S. trademark registrations, 6 trademark registrations in Canada and 2 in Mexico.

In a sworn affidavit, Joshua S. Scherer, a partner with Perella Weinberg Partners, investment bankers to Hostess, said the $27.5 million price equates to a multiple of about 0.34 times annual revenues, suggesting annual Drake’s sales of $81 million.

Mr. Scherer characterized the multiple as “toward the lower end of revenue multiples for non-distressed ‘going concern’ precedent transactions.”

Making the McKee bid particularly attractive is that it does not include any manufacturing facilities, while comparable transactions do, Mr. Scherer said.

McKee operates plants in Gentry Ark.; Collegedale, Tenn.; and Stuarts Draft, Va. The company also operates a breakfast cereal plant in Collegedale. In addition to Little Debbie, McKee sells snack bars under the Sunbelt brand, ready-to-eat cereal under the Heartland brand and snacks and cereals under the Fieldstone Bakery brand. McKee also operates a distribution center at Kingman, Ariz.
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