The businesses yesterday (July 5) announced the deal, which is set to be completed in the third quarter of this year and make Hostess a publicly listed company valued at around $2.3bn.
The acquisition comes three years after Hostess was bought out of liquidation by Dean Metropolous and Apollo Global Management.
Following completion, funds managed by affiliates of Apollo and Metropoulos will hold a combined stake of around 42% in The Gores Group’s affiliate Gores Holdings, while Dean Metropoulos and Bill Toler will stay on as Hostess executive chairman and CEO respectively.
“Hostess presents a unique opportunity to invest in an iconic brand with strong fundamentals that is poised for continued growth,” said The Gores Group chairman and CEO Alec Gores.
Business has been transformed
The Hostess business Gores is acquiring is very different to the one that collapsed in 2012.
It previously operated 11 bakeries running at around 54% capacity and producing 150 products with an average shelf life of 26 days, according to Hostess. Today’s business has three bakeries operating at 80% capacity, producing a simplified range of 90 products with a typical shelf life of 65 days.
It now employs 1,170 compared with 8,000 in 2012.
Hostess suggested the company’s extended shelf life technology and distribution into retailers’ warehouses gave it an edge over competitors offering shelf lives of 15 to 25 days and delivering direct to stores.
Extended shelf life bread
Extended shelf life bread, brought to market last year, had gone “extremely well”, according to Hostess.
“This is particularly true in drug, dollar and convenience stores where they need a supply chain solution for bread,” said Toler.
The regional bakery model used by many competitors was inefficient, according to Hostess, which added that $130m of investment had gone into making Hostess business highly efficient and automated.
“When we want to make a new Twinkie flavour we make it in one bakery and distribute in nationally,” added Toler.
The Gores Group and Hovis Limited
Hostess’s new owner, Los Angeles-based private equity firm The Gores Group, is no stranger to the bakery market.
In 2014 it completed a joint venture with UK business Premier Foods, owner of the Mr Kipling cake brand, to split off Premier’s bread and milling operation as new business Hovis Limited.
Premier’s operational bakery and flour milling estate, associated distribution network and assets transfered to the joint venture.
Hovis, which was founded in 1886, is one of the UK’s three largest bread brands.
Hostess sales have grown each year since the business returned to market, and were $621m in 2015, which Hostess said was around $1bn in terms of what consumers spent at the till.
Brand awareness at 90%
“Hostess has incredible brand power, and 90% brand awareness,” according to Toler, who added the strength of the business in the single-serve market made it a premium priced brand in the sweet bakery category.
The sweet bakery category declined when Hostess left the market following its collapse In 2012, said Toler, and returned to growth when Hostess went back on shelf.
“Customers know to grow this category they have to be strong with us – and they work very collaboratively with us to build displays and take our innovation,” he added.
According to Nielsen data for the four weeks to May 21, Hostess currently has a 16.3% share of the sweet baked goods market, and Hostess says it has “tremendous growth opportunities”.
“Snacking as an overall behaviour continues to grow and expand,” Toler told analysts. “We have room to grow and we will expand in depth and breadth.”
Hostess last month announced its first acquisition since returning to market – buying Massachusetts-based bakery Superior Cake Products, which gives the business access to the in-store bakery market.
“We see significant growth potential in the in-store bakery channel,” said Toler at the time of the acquisition. “This is a powerful opportunity to extend Hostess’s brand equity across categories, segments and channels, while capitalizing on the upward indulgence trend in the baked goods arena.”
Hostess this week said it will look at developing a full in-store offer, potentially starting with large tray packed muffins and brownies supplied frozen.
Frozen retail products
Other growth opportunities flagged up by the business are:
- Frozen retail: Hostess is launching a frozen Twinkie in Walmart stores ahead of a wider US roll out.
- Foodservice: Bulk-pack foodservice goods including Twinkies, Donettes and Mini Muffins
- Branded goods: Hostess this year announced a partnership with Mars that brought MilkyWay and M&M’s brownies to market, and hopes to expand this range further.
“This new phase in Hostess' evolution and partnership with The Gores Group and our broader investor partners will continue to propel Hostess into a growing and innovative company with significant reach and potential,” said Dean Metropoulos. “We are very excited to continue to build this wonderful company and its iconic brands.”