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Who Gets Hostess?

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Goodbye, Wonder Bread®Goodbye, Twinkies®, Ding Dongs®, Ho Hos®, Suzy Q's®, CupCakes, Sno Balls ® and Mini Muffins®.

Mighty Hostess has finally closed its doors.

If there was ever proof that grand multinational Illuminati cabals do not exist  – that no one is secretly running the world behind the facade of democratically elected governments –  it would be the sudden implosion of Hostess Brands.

<img src="/media/images/user_13882/hostessclosed_large.PNG" />

Poor Twinkies®. The creme-filled yellow dye no. 5 spongecake survived incoming machine gun fire from the twentieth floor of a skyscraper in Die Hard (1988) and the end of the world in Zombieland (2009) only to succumb to the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM).

If the dead rise tomorrow, we're screwed. But in a world without Wonder Bread® or Mini Muffins®, would it even matter?

Time for Q & A.

Q: How do you know that Hostess will fail? I heard that management is currently in mediation with the union. 

A: It's true that Judge Robert Drain has pushed for Hostess management and the BCTGM to try mediation first, but that's pro forma for bankruptcies where multiple creditors are involved. Moreover, it doesn't change the inventive calculus: Hostess management has asked the Court for a bonus of up to 75% of their annual pay so that management can stay on and help “wind down the company.”

The U.S. Trustee, Tracy Hope Davis – who's role is to provide guidance to people who are affected by the bankruptcy (like Hostess' creditors)– objected to the wind down plan as essentially a rake-off for Hostess insiders. The unions seconded the objection, claiming that such plans “made a mockery” of collective bargaining rights in bankruptcy.

Now, whenever that happens, the disputing parties are cordially but firmly invited to mediate their differences. For Hostess' managment, this is just a legal stumbling block. De jure, Hostess' management, creditors, and affiliated unions are meeting to iron out their differences. De facto, the company is drowning in debt and getting hammered from all sides by everything from pension obligations to rising commodities prices.

Court will re-adjourn on Wednesday, Nov. 21.

Q: Now what?

A: After the mediation fails, Hostess will be granted bankruptcy protection and the company's brands will be sold to the highest bidder.

Q: Who's bidding?

A. Good question! The recent consolidation of the bread industry has narrowed the field, somewhat, but here's a list of companies, many of them publicly traded entities, that we know to be interested:

Sun Capital Partners The private equity firm said it would be interested in buying Hostess. In exchange for a sweeter deal from the unions, Sun Capital is prepared to re-open the bakeries and keep Hostess' existing employees on. The firm's portfolio includes nationally recognized brands such as Boston Market, Hickory Farms, Fazoli's Restaurants, Gordman's, ShopKo, and Captain D's.

Flowers Foods (NYSE: FLO) Headquartered in Thomasville, Georgia, Flower Foods extended its loan agreements on Monday. This will increase the company's access to merger and acquisition funding. However, Flowers has made repeated guarantees to investors that the company will not acquire any brand that comes with union baggage. Flowers Foods includes brands like Nature’s Own, Sunbeam, and Mi Casa.

Hurst Capital Sarasota native Hurst Capital filed a letter of intent in bankruptcy court Monday to buy Hostess’ assets. Hurst is primarily interested in Hostess' signature brands and recipes, which would dovetail nicely with the company's existing patent portfolio.

Bimbo Group (BIMBOA.MX) Bimbo is one of the largest bakeries in the world, as well as one of the largest packaged food players. The Mexican-based company currently owns 100 brand names, including Entenmann’s, Sara Lee, Sunbeam, Fango, and Nutella.

Metropolous & Co Private equity company, and owners of Pabst Brewery. According to Daren Metropolous, Metropolous & Co. “my family would love these brands” is “actively seeking” a deal for Hostess. Dean Metropolous, the self-made Greek billionaire (#360 on the Forbes 400) has “a knack for investing in and turning around faded food brands. In 1996 he and partners formed International Home Foods, then revamped Chef Boyardee pasta products, PAM cooking spray and Bumble Bee seafood. In 2000 he sold IHF to ConAgra for $2.9 billion. Four years later he bought Aurora Foods out of bankruptcy and merged it with Pinnacle Foods (Aunt Jemima, Duncan Hines, Log Cabin).” (Source: Forbes 400 Profile)

Q: Is that all? I heard that Kraft might be interested.

A: It's been argued that Kellogg's (NYSE: K) or Mondelez International (NASDAQ: MDLZ) (“Kraft International”) might be interested in acquiring Hostess. 

Frankly, I don't see it happening. Kellogg's is just one of the dozens of high profile multinationals being weighed down by soft demand overseas. The online/mobile space is another challenge that Kellogg's is coming to grips with. The company also has its hands full managing public perception due to the recent Mini Wheats recall. (Metal fragments in cereal tend to freak Wal-Mart moms out.) Kellogg's has its hands full right now. 

Mondelez International/Kraft Int'l is in a better position, with expected top-line growth of 5%-7%. While the company is primarily focusing on organic growth, it's also actively seeking fresh acquisitions in the BRIC market. Mondelez acquired Moroccan cookie maker Bimo less than two months ago.

But therein lies the rub: Hostess isn't a Moroccan cookie maker. Hostess is an established American brand, which means that its strategic value for BRIC penetration is non-existent. Mondelez wants established local brands that lack its distribution network and economies of scale, yet resonate with the locals: Moroccan cookies for Morocco, Chinese packaged rice cakes for China, Russian-made sweets for Russians. You get the drift. 

Foolish Verdict

Not since the RJR-Nabisco takeover has the fate of so much of America's unhealthy culinary heritage been up in the air.

So who gets Hostess? My money is on the Metropolous family. Metropolous & Co easily has the money to outbid Hurst Capital. Flower Foods might be able to put in a higher bid, but they have to answer to shareholders. Sun Capital's bid depends on an appeal to the unions. However, the Supreme Court has previously rejected the argument that prior agreements should be honored during bankruptcy proceedings. Gregory Rayburn has labeled the idea that Bimbo would swoop in and gobble up Hostess as “a misconception,” citing anti-trust concerns that may apply to Flower Foods as well. 

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