by John Lawrence from the San Diego Free Press
Twinkies: The Junk Food That Is an American Tradition
Remember when Twinkies went out of business and people mourned the loss of such a time honored treat? How could such a sorry state come to pass? Weren't Twinkies profitable any more? Were people consuming less of them because they were mostly sugar and not good for you? Wrong and Wrong. As it turns out, it was all about some hedge fund shananigans designed to make the wealthy even wealthier while sacrificing the jobs and pensions of loyal workers. It's called financial engineering, and it creates profits by destroying jobs.
As I wrote way back in 2012 in a San Diego Free Press Article, Twinkies’ Twisted Tale: Junk Food Devoured By Junk Bonds:
All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearean tragedy than talk show banter.
It’s a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.
Twinkies have been around since the 1920s. They are as American as, well, apple pie. But Twinkies parent company, Hostess, was more akin to a pinata for the rich and their penchant for financial engineering. Hostess had been bought and sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings, had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands’ union workers agreed to pay cuts and made contract concessions in exchange for equity.
First Load Company With Debt. Then Declare Bankruptcy.
Bringing the saga of Twinkies up to date, on January 10, 2012, Hostess Brands filed for Chapter 11 bankruptcy for the second time, but management said that it would continue to operate with $75 million debtor-in-possession financing from Monarch Alternative Capital, Silver Point Capital and other investors. The company stopped paying future pension benefits after August, thereby breaking its union contracts.
After that Apollo Global Management and Metropoulos & Company spent $186 million in cash to buy some of Hostess’s snack cake bakeries and brands in early 2013. Less than four years later, they sold the company in a deal that valued Hostess at $2.3 billion. Apollo and Metropoulos have now reaped a return totaling 13 times their original cash investment. Along the way some 18,000 unionized workers lost their jobs and their pensions.
The New York Times wrote:
Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry, according to a joint study that The Times conducted with Equilar, a board and executive data provider. The study covered thousands of publicly traded companies; privately held corporations do not report such data.
On average, the heads of private equity firms earn about 10 times as much as the heads of banks. Take Stephen Schwarzman of the Blackstone Group for example. Last year he earned $799,838,742. Then in second place was Leon Black of Apollo Global Management. He earned $799,838,742. Part of his earnings, no doubt, came from his sale of Hostess Twinkies.
The New York Times noted:
Private equity firms note that much of their top executives’ wealth stems from owning their own stock and that they have earned their fortunes bringing companies back to life by applying their operational and financial expertise. Hostess, a defunct snack brand that was quickly returned to profitability, is a textbook example of the success of this approach.
Hostess Made Profitable Again by Laying Off Workers
Yes, Hostess was returned to profitability by laying off 18,000 workers, destroying their union and raiding their pension fund - all so a few billionaires could lick their sumptuous chops over the killing they made in the billions of dollars. Workers lives destroyed equal billionaire private equity fund operators' (also known as leveraged buyout artists) profits. The LBO artists buy a company and then load it up with debt. The purpose of the debt is not to produce more or better product, build more plants or hire more workers. The purpose of the debt is solely so the new owners can have a fabulous payout.
In American capitalism it's only the brand names that have any value anyway. Manufacturing is passe. Manufacturing can be contracted out to the cheapest non-union or automated provider. The owners of the brand names make most of the profits. Politicians pull much the same thing when they want to privatize a public asset. They load the asset up with debt, and then complain that because it's government owned, it can't operate efficiently and needs to be privatized. Once privatized it becomes subject to financial engineering and is tossed around like a hot potato with hedge fund executives and private equity executives making money after every toss. The usual victims are the workers, unions and pension funds, not to mention consumers. Employer provided health insurance also goes by the board.
Donald Trump is making a big deal out of cajoling companies to keep jobs in the US. GM is investing billions of dollars right here. However, most of the big corporations' investments in the US are in robots. It seems that they are even cheaper than Chinese or Mexican workers because they never get sick, never miss a day of work, and don't require a union or a pension. So bringing manufacturing back to the US is the latest trend. It doesn't mean, however, that jobs are coming back to the US. It does mean that automation and robots in the US make it more cost effective to manufacture here.
The Sweetest Comeback Ever
Fans gathered on Rockefeller Plaza in New York City as Al Roker of the "Today" show drove up in a delivery truck with a load full of Twinkies. He was going to give Americans what they wanted: Twinkies. As the crowd roared and cheered, the Twinkies flew through the air to the assembled throng. One woman stuffed them down her dress; another man crammed them into his mouth. It was the summer of 2013 and, as Twinkies came back on the market, there was a feeding frenzy. The return of Twinkies was billed on the "Today" show as the sweetest comeback ever. However it was not so sweet for the 18,000 workers who had lost their jobs and their pensions due to the financial engineering of Apollo Global Management and Metropoulos & Company. For them, considering the billions of dollars they reaped, it was a veritable sweet comeback indeed.
As a postscript we found this: Apollo Global Management, the $186 billion private equity firm co-founded by billionaire Leon Black, has agreed to pay $52.7 million to resolve Securities & Exchange Commission charges that its private equity funds misled investors about fees.