During all the presidential election coverage, we heard tons of misinformation about those greedy private equity firms which would swoop in and lay additional debt on companies in an effort to try to save them while making money for themselves in the process. Romney was villified for doing this at Bain Capital, yet you will not hear the lame stream media even bring this up in the case of Hostess. Prominent Democrat Tim Collins of Ripplewood Investements, another private equity firm, did exactly what Romney and Bain Capital did in trying to save companies. Sometimes it works and other times it doesn’t.
The hypocrisy is mind boggling to me. If one private equity firm is lambasted in the media, why aren’t the ones being ran by big time democrats given the same treatment? Personally, I have no problem with private equity, but what I do have problems with is the mass media’s bias towards some companies while giving others a pass.
Perhaps one of the most interesting aspects of the just announced Hostess liquidation, one that will be largely debated and discussed in the media, or maybe not at all, is the curious cast of characters and the peculiar history of this particular bankruptcy. Some may not be aware that the company’s Chapter 11 (or colloquially known as 22) bankruptcy filing this January, which today became a Chapter 7 liquidation, was the second one in the company’s recent history, with Hostess, previously Interstate Bakeries, emerging from its previous protracted multi-year bankruptcy in 2009. What is curious is that its emergence had all the drama of a anti-Mitt Romney PAC funded thriller, with a PE firm, in this case Ripplewood holdings, injecting $130 million in order to obtain equity control of Hostess as it was emerging last time. There were also more hedge funds, investment banks, strategic buyers, politicians involved in this particular story than one can shake a deep fried numismatic value Twinkie at. More importantly, however, as America has been habituated following the last season of the reality TV show known as the presidential election, if Private Equity then “bad.” Only this time there is a twist: because it wasn’t really PE that was the pure evil in the Obama long-term campaign, it was associating PE with Republicans, and thus: with jobs outsourcing. And here comes the Hostess twist: because Tim Collins of Ripplewood, was a prominent Democrat, a position which allowed him to get involved in the first bankruptcy process in the first place, due to his proximity with the Teamsters’ long-term heartthrob Dick Gephardt (whose consulting group just happens to also be an equity owner of Hostess). In other words, the traditional republican-cum-PE scapegoating strategy here will be a tough one to pull off since the narrative collapses when considering that it was a Democrat who rescued the firm, only to see it implode in a trainwreck that has resulted in the liquidation of a legendary brand, and 18,500 layoffs.
But it only gets better. Because the full cast of characters involved here is quite stunning, as David Kaplan summarized so well recently:
Ripplewood is run by Tim Collins, 55, who’s been at the center of other famed PE transactions. Known as a brilliant capitalist-philanthropist-networker, he’s an eclectic character: a Democrat in an industry of Republicans; an Adirondack enthusiast dreaded by pheasant and fish; a board member at the Yale divinity and business schools; and someone who took a year at 31 to work at a refugee camp in the Sudan. Ripplewood orchestrated the $1.1 billion turnaround in 2000 of the Long-Term Credit Bank of Japan, which marked the first time that foreign interests controlled a Japanese bank. (Collins made the cover of Fortune Asia for it.) The bank was renamed Shinsei, and in 2004 it had a lucrative initial public stock offering. Far less fortunately, in 2007 Ripplewood acquired Reader’s Digest — and saw its $275 million investment vanish in Reader’s Digest’s bankruptcy filing in 2009. (Collins reportedly had visions of merging Reader’s Digest with the magazine division of Time Warner (TWX), which owns Fortune.)
Ripplewood’s foray into Hostess was partly enabled by Collins’s connections in the Democratic Party. He wanted to explore deals with union-involved companies and sought the help of former congressman Gephardt, who in 2005 founded the Gephardt Group, an Atlanta consulting firm that provides “labor advisory services.” In his 2004 presidential bid, Gephardt — whose father was a Teamsters milk truck driver — was endorsed by 21 of the largest U.S. labor unions; in 2003, Collins was one of 19 “founding members” of Gephardt’s New York State leadership committee. (Today, Ripplewood and Hostess are listed online as major clients of Gephardt’s consulting group, which is also an equity owner of Hostess.) Back when Hostess was coming out of the first bankruptcy, Gephardt’s credibility with both Ripplewood and the Teamsters gave them each a little more room to break bread.
During this first bankruptcy, Hostess was almost sold. In 2007 it warded off a $580 million bid from its biggest competitor, Bimbo Bakeries USA. Bimbo Bakeries USA is part of Grupo Bimbo, the Mexican baking giant that owns such brands as Sara Lee, Entenmann’s, Freihofer’s, Arnold, Boboli, Ball Park Buns, and Thomas’ English Muffins. Joining Bimbo in the bid were the union-friendly investment arm of supermarket titan Ron Burkle and the Teamsters themselves.
Hostess was able to exit bankruptcy in 2009 for three reasons. The first was Ripplewood’s equity infusion of $130 million in return for control of the company (it currently owns about two-thirds of the equity). The second reason: substantial concessions by the two big unions. Annual labor cost savings to the company were about $110 million; thousands of union members lost their jobs. The third reason: Lenders agreed to stay in the game rather than drive Hostess into liquidation and take whatever pieces were left. The key lenders were Silver Point and Monarch. Both are hedge funds that specialize in investing in distressed companies — whether you call them saviors or vultures depends on whether you’re getting fed or getting eaten.
Based in Greenwich, Conn., Silver Point was founded in 2002 and has approximately $6.5 billion under management; its two co-founders are 49-year-old Edward Mulé and 47-year-old Robert O’Shea, both former Goldman Sachs (GS) partners. Silver Point helped bail out Krispy Kreme Doughnuts, Delphi, CIT Group, and various TV stations. Monarch, based in Manhattan, was created in 2008 as a spinoff from the Quadrangle Group. It reportedly has more than $3 billion under management; among its three co-founders are 52-year-old Michael Weinstock and 48-yearold Andrew Herenstein, both formerly of Lazard. Monarch has invested in Eddie Bauer and the Texas Rangers. (In 2010, after Herenstein sent a letter to baseball teams warning them not to approve a sale of the Rangers “at a price below fair market value,” the letter became public, and the Dallas Morning News ran this ominous blog headline: MONARCH ALTERNATIVE CAPITAL THREATENS BASEBALL.)
Silver Point and Monarch, along with about 20 other lenders, owned about $450 million of Hostess secured debt at the time of the bankruptcy filing in 2004, according to court records. Remarkably, though — given that Hostess’s financials are now supposed to be an open book in federal bankruptcy court — it’s unclear how much the lenders actually paid for those notes. But it’s presumably less than face value. Opportunistic investors like Silver Point and Monarch commonly buy distressed debt at a considerable discount. Their strategy: Invest in fundamentally “good” companies that have “bad” capital structures brought about by overborrowing, bankruptcy, or other corporate stresses.
Neither the specific amount put up by each investor nor the percentage of the total debt is public record (In re Hostess Brands, Case No. 12-22052). So it’s impossible to know for sure how much “skin in the game” the creditors have. But according to sources with knowledge of Hostess’s debt structure, Silver Point owns about 30% of the debt; Monarch, also about 30%; and the other lenders combined own the remaining 40%. Clearly, it was Silver Point and Monarch, along with Ripplewood, that had the biggest bets going forward.