(By “BlueBeaumont
Boyz, DailyKos.com, 18 November 2012)
The purpose of this diary is to explore
the economic and financial background of those pillaging and burning a
(formerly) great American brand. Hostess Bakery created several American
comfort foods including Ding Dongs, Ho Hos, Wonderbread, Suzy Qs, Dolly Madison
Zingers, and Drake's Ring Dings. The fact that Hostess Bakery was the
2012 version of 2008's General Motors and Ford Motor Company is beside the
point of this diary. However, let me note that Ding Dongs, Ho Hos, etc.
do not mesh well with diet-conscious cuisine. Since moving to California
ten years ago, I am not sure I have had more than two or three doughnuts during
this period. Carbs and sugar and calories, oh, my! Nevertheless, Hostess is now a great American
tragedy, in no small part related to venture capitalists and corporate raider.
This diary is the story of what has become normal in American business
history and unfettered capitalism since 1865 and the end of the American Civil
War. The robber barons came to the fore and such American luminaries as
Cornelius Vanderbilt, John D. Rockefeller, and others earned their fortunes at
the misfortune of others. Sometimes, this misfortune was facilitated by
the very people who later benefited from the 'distressed events.' More recently, Michael Milken, Carl Icahn,
Monarch Alternative Capital LP, and Silver Point Capital LP have taken up the
mantle of the robber baron. The venture capitalists see opportunity in
the recession and swoop in to take advantage.
For an
interesting filmaic history of the robber barons, the History Channel now has
some fantastic historical background on the rise of the robber barons in 'The
Men Who Shaped America.' Modern day robber barons and their admirers
provide commentary (think Donald Trump, GE's former-CEO Jack Welch,
Time-Warner's former-CEO Richard Dean Parsons, CNBC Mad Money's Jim Kramer,
etc.). According to the History Channel,
Vanderbilt reportedly attempted to sell railroad rights of way into New York
City to various railroads only to be rebuffed. 'Sell' in this case might
be synonymous with 'extort.' When the railroads refused to open their
purses to Vanderbilt, he blocked them from crossing the Albany Bridge towards
New York City, causing a financial panic. Seeing opportunity in the misfortune
of others that directly resulted from his own actions, Vanderbilt purchased as
many shares of the New York Central on the New York Stock Exchange as he could
at firesale pricing. Vanderbilt parlayed his investment into the control
of the New York Centeral and into purchase of other railroads in similar
fashion.
To further his
transportation empire, Vanderbilt financed the early kerosine industry based in
Eastern Ohio and Western Pennsylvania. The direct beneficiary of
Vanderbilt's efforts to fill his freight trains was an upstart oilman by the
name of John D. Rockefeller. Eventually, Rockefeller bankrupted hundreds
of refinery owners as he solidified his hold on the kerosene and oil industry.
When Tom Scott, head of the Pennsylvania Railroad attempted to build his
own oil pipeline to compete with Rockefeller, Rockefeller closed his Pittsburgh
refineries, costing Scott fifty percent of his freight revenue.
Rockefeller's actions lead Scott's laying off thousands of workers and
decreasing the wages of the remaining workers. The rioting that ensued
nearly destroyed the Pennsylvania Railroad (full disclosure, at least three
generations in my family worked for the PRR).
Needless to say, today's vulture capitalists, including Monarch
Alternative Capital and Silver Point Capital, are merely a stone's throw
morally away from Vanderbilt, Rockefeller, Carnegie et al. Today, when
you discuss the new robber barons, famous American company names like
Blockbuster, the Texas Rangers, the Dallas Stars, Muzak, and Hostess Bakery
enter the conversation.
When you think about Hostess Bakery, you need
to explore the financial underpinnings of the company. Apparently, the
Monarch Alternative Capital LP and Silver Point Hedge Funds are the primary
culprits. The machinizations of Monach and Silver would make Vanderbilt and
Rockefeller proud. These two hedge funds are known as distressed debt
investors, purchasing the debt of troubled companies at steep discounts. When Hostess Brands announced that it would
close up its operations, the forces most responsible for that decision were two
hedge funds that control hundreds of millions of Hostess debt and which have
finally decided they won't squeeze any more filling into the Twinkie. The funds, Silver Point and Monarch, are what
are known as distressed debt investors. They buy the debt of troubled
companies—usually at steep discounts. Some consider them white knights who are
willing to take make risky investments in companies on the verge of failure.
Others say they are “vulture funds.” Only
Silver Point and Monarch could have kept Hostess out of liquidation and kept
the Twinkie bakery ovens firing. But they were, ultimately, unable to reach a
deal with the unions that represents the workers who make and deliver products
like Twinkies, Wonderbread and Ding Dongs. Without large union concessions- what
some would say, total union capitulation- the hedge funds decided Hostess would
have to die.
Of course, like
diarist bluebarnstormer points out, Monarch and Silver Point could not be
trusted to work in the best interests of the union members, their families and
their pension funds. The hedge fund managers' only interest lies in
pulling as much capital out of Hostess Bakery and putting in as little as
possible. Profitability is not the issue. They pillaged as much of
the pension funds as possible and now walk away, leaving thousands of employees
and their families shattered. Interesting
of course that this all came to fruition the week following the election rather
than during the week prior. Just wondering what would have happened had
Monarch and Silver Point done the deed in October 2012.
Now to the
Monarch and Silver Point Hedge Funds and their principles. Bloomberg's
BusinessWeek has profiles on each of these Vanderbilt and Rockefeller
personifications. Monarch Alternative
Capital LP is a privately owned hedge fund sponsor. The firm invests in the
public equity and fixed income markets across the globe. It primarily invests
in debt of bankrupt and distressed companies. The firm also invests in equities
received in connection with the conversion of such debt into equity. It employs
a fundamental analysis to make its investments. The firm conducts in-house
research to make its investments and it was formerly known as Quadrangle Debt
Recovery Advisors. Monarch has
approximately $5.0 billion in assests under portolio management and is based in
New York with an office in Israel. Monarch's corporate website
self-describes its approach as research-oriented and 'event-driven.'
Research-oriented suggests a proactive approach and vision.
Event-driven suggests a more reactive approach. Kind of like sharks
in the water. In 2010, Monarch became
involved in the messy bankruptcy of the Texas Rangers baseball team and the
Dallas Stars hockey team when it purchased the debt of Hicks Sports Group LLC.
Monarch then threatened the 'involuntary bankruptcy' of its Texas Rangers
holdings if Commissioner Bud Selig did not play by Monarch's rules and
attempted to seize the team for sale to an acceptable bidder.
Still no word
from Major League Baseball concerning its imminent seizure of Your Texas
Rangers in order to expedite the sale to Chuck Greenberg and Nolan Ryan's
Rangers Baseball Express. But, finally, there's been direct contact with
Monarch Alternative Capital, the main lender holding up the deal with Hicks
Sports Group: The New York Times has gotten hold of an e-mail Monarch's
managing principal, Andrew Herenstein, sent to MLB owners gathered in New York
City this week for owners' meetings. He
more or less reiterates what Sports Business Journal reported this week and
what Bloomberg News noted in mid-April: Should Bud Selig make a move, so too
will Monarch -- straight to the federal courthouse, involuntary bankruptcy
papers in hand.
It all comes down
to the numbers. Tom Hicks last year defaulted on $525 million in loans.
Greenberg's offer has long been believed to be between $570 and $575 million.
The creditors claim that "additional costs, including unpaid
interest," as The Times notes, have pushed Hicks's debt closer to $600
million. The creditors, right now set to get about half of the sale proceeds
(unless MLB steps in and nullifies their claims completely), want their money.
So too does Hicks, which is why, sources say, he's been hoping to bring
Houston's Jim Crane and his higher offer back to the playing field. Greenberg's
stuck in the middle and staying quiet, though Monarch says now that "the
Greenberg-Ryan group had rejected 'various modifications' in the sale agreement
that would increase the proceeds to the lenders," according to Times
writer Richard Sandomir.
Long story
short: If MLB steps in, Monarch's suing. And it'll get "costly,
distracting and messy," writes Herenstein. "It would be a bad result
for the Texas Rangers, M.L.B. and the banks." And, don't forget, the fans. In February 2011, Monarch was connected to
Carl Icahn in an attempt to purchase Blockbuster for $300 million following the
latter's bankruptcy filing. Did I mention that Monarch and Icahn were
Blockbuster creditors who helped finance the actual bankruptcy filing, thus
having access to the internals? Creditors
including billionaire Carl Icahn and Monarch Alternative Capital LP are
targeting Blockbuster Inc., the bankrupt movie-rental company, in a possible
buyout for less than $300 million, a person familiar with the matter said.
Icahn and Monarch are Blockbuster creditors who helped to finance the
bankruptcy, making them potential candidates to buy the company, said the
person, who declined to be identified because the discussions are private.
Silver Point
Capital LP is a privately-owned hedge fund sponsor based in Greenwich, CT.
Interestingly, the corporate website has less than limited information
available to the public. Silver Point
Capital L.P is a privately owned hedge fund sponsor. The firm manages hedge
funds for its clients. It invests in the public equity, fixed income, and
hedging markets of the United States. The firm primarily invests in securities
of distressed, large-cap, and Mid-cap companies; bank debts; bonds; and trade
claims. It specializes in credit analysis and diversified credit-related
investments. Silver Point Capital is based in Greenwich, Connecticut. Silver Point's corporate officers include
Edward A Mule, Co-founder and Partner, age 50, Robert J. O'Shea, Co-founder and
Partner, age 48, David Steinmetz, Chief Financial Officer, Michael A. Gatto,
Principal, age 45, John M. Gannon, Principal, and Richard Parisi, Board
Director. Mule and O'Shea are alums of our friends at Goldman, Sachs.
Some of Silver
Point's 'distressed events' include Kripsy Kreme, Moneygram, Herbst Gaming,
Dana Holdings, Torch Energy Royalty Trust, Cooper-Standard Holdings, and
FiberMark. Silver Point also has investments in Sage Telecom, Granite
Broadcasting and Communications Corporate of America. In April 2011, Silver Point was involved in
the attempts of Mood Media Holdings to merge with Muzak, a provider of music,
messaging and video for businesses. Cleary
Gottlieb is representing Silver Point Capital, a private equity firm, and Muzak
Holdings, a premier provider of music, messaging and video for business, in
connection with the proposed acquisition of Muzak by Mood Media Corporation, a
leading in-store media specialist. Under the terms of the merger agreement, a
subsidiary of Mood will merge with and into Muzak, with Muzak unitholders
receiving cash and contingent consideration in exchange for their units in
Muzak. The transaction values Mood at approximately $345 million on an
enterprise basis.
Who Killed Hostess Brands and Twinkies?
(By Helaine Olen, Forbes, 16 November 2012)
I’m sure you have, by now, heard the news.
Hostess Brands, the company that gave us such remembered
childhood treats as Twinkies, Ding Dongs, Devil Dogs and other baked foodstuffs
that have fallen into disfavor in our more gourmand age, announced today that
it would be closing for business, effective immediately. More than a few observers say they know who
to blame for the demise of the iconic company: the Bakery, Confectionary,
Tobacco Workers and Grain Millers International union, which represents
thousands of striking Hostess Brand workers who have refused to accept a new
contract that would do everything from slash their salaries to their retirement
benefits.
Time for a
reality check. Hostess has been
sold at least three times since the 1980s, racking up debt and shedding
profitable assets along the way with each successive merger. The company filed
for bankruptcy in 2004, and again in 2011. Little thought was given to the line
of products, which, frankly, began to seem a bit dated in the age of the
gourmet cupcake. (100 calorie Twinkie Bites? When was the last time you entered Magnolia Bakery and
asked about the calorie count?)
As if all this
were not enough, Hostess Brands’ management gave themselves several raises, all
the while complaining that the workers who actually produced the products that
made the firm what money it did earn were grossly overpaid relative to the
company’s increasingly dismal financial position. So now an estimated 18,500 workers will join
the nation’s unemployment rolls. But while Hostess Brands might soon become a
forgotten name from the past, it’s unlikely such a fate awaits such signature
products as Twinkies. Company executives have already asked for bankruptcy
court permission to begin the process of selling off their famed product lines
to other companies.
Finally, a
personal note: A few years ago, my husband picked our children up from a
playdate at a home where, he said, it seemed like more food was banned than
allowed, there was no television, and it was all too politically correct in the
way all too many middle class childhoods are today. My husband’s response?
Before bringing the boys home, he stopped in at a local grocery and introduced
our ecstatic children to fine products of Hostess Brands. “Yodels,” he told me,
“never tasted so good.”
Addendum: Since
this has come up in the comments, I need to remind everyone that Hostess Brands
acquired Drake’s Cakes in one the many of the misbegotten mergers it was
involved in.
Alternatives to
Twinkies & Other Hostess Brands
Little Debbie is
a strong competitor of Hostess. For most of the Hostess products, Little Debbie
makes an alternative. Little Debbie makes Cloud Cakes, their answer to Hostess
Twinkies.
Drake's, the
company that makes Yodels (among other snack cakes) is owned by Hostess and
will also be going out of business. Little Debbie has Swiss Rolls as an
alternative to Ho-Hos and Yodels.
Of course there
are Little Debbie Alternatives to Hostess cupcakes (the Little Debbie cupcakes
may be more famous), but they also makes alternatives to Ring Dings and Ding
Dongs. Tastykake has their own cream-filled cupcakes.
Drake's makes a
chocolate cake filled with peanut butter cream and covered with chocolate
frosting. It's not exactly the same, but Tastykake makes a cake covered in
chocolate and peanut butter.
Zingers are made
by Dolly Madison, owned by Hostess, so Dolly Madison will likely be shutting
down, too. Tastykake makes good alternatives to Zingers called Krimpets. I
could only find Butterscotch Krimpets, but their Kandy Kakes look like a good
alternative to the chocolate Zingers.
Once again,
Little Debbie has an alternative to these Hostess and Drake's products. Little
Debbie has Devil Cremes that are the Devil Dog knock-offs.
Drake's has
coffee cake snack cakes. I love coffee cake, and Tastykake has some coffee cake
snack cakes that can replace the Drake's coffee cake.
These mini
doughnuts are a staple at convenience stores. While Donettes may be the most
well-known mini doughnut, other brands make mini doughnuts that are just as
good. Little Debbie, Tastykake, and Duchess have versions of the powdered sugar
variety, and Duchess has mini chocolate doughnuts.
Hostess makes
convenient little fruit pies that you can pick up at a convenience store.
Fortuantely Tastykake makes a wide variety of small fruit pies, including
pumpkin pie.
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