THE TWINKIE MIRACLE With ingenuity, capital and a little creative chemistry, billionaire C. Dean Metropoulos and Apollo Global's Andy Jhawar rescued one of America's most beloved snacks- and set themselves up to feast on a $2 billion gain. BY STEVEN BERTONI REINVENTING AMERICA PHOTOGRAPHED BY JAMIE KRIPKE FOR FORBES alk in the door of Hostess Brands' flagship bakery in Empo- W ria, Kans. and your first thought is: What a dump. The former front office for the bakery that pumps out classic American treats like golden Twinkies and swirl-topped CupCakes is a series of dank, near-empty rooms with scuffed, oatmeal-color linoleum floors, water-stained ceiling panels and a jumble of mismatched office furniture that looks like it was picked up off the curb. Three minutes in this place and you're suddenly thankful for the wilted sign on the front door warning visitors that firearms are barred from the premises. This grim wing of the Hostess plant is a leftover from the old Hostess-the one that debt, pension costs and mismanagement shuttered in 2012. But throw on a hairnet and pass on to the newly rehabilitated factory floor, and it makes sense why billionaire C. Dean Metropoulos, Apollo Global senior partner Andy Jhawar and Kansas Governor Sam Brownback are standing here, breathing in the sticky sweet air on a foggy April morning. The new factory is bright and clean. Tight rows of Twinkies march along the $20 million Auto-Bake system with the precision of Soviet soldiers in a May Day parade. Yellow robotic arms, which look like they should be welding Teslas rather than boxing Twinkies, stack snacks with hypnotic rhythm. This 500-person plant produces more than 1 million Twinkies a day, 400 million a year. That's 80% of Hostess' total output-output that under the old regime required 14 plants and 9,000 employees. And it's about to get more efficient: Metropoulos and Jhawar just installed a second Auto-Bake system, this one for CupCakes, and the governor is here to cut the ribbon. In truth, it's more a resurrection of an American icon than a ribbon-cutting. Hostess' closing was a cultural moment across the U.S., offering proof of the dire state of American manufactur ing. After over a decade of failing health that saw two bankruptcies and five different CEOs, 74 | FORBES MAY 4, 2015REINVENTING AMERICA: TWINKIES WHO'S HUNGRY? Metropoulos and Apollo aren't the only ones who see opportunity in the grocery aisle. 3G Capital and Berkshire Hathaway just backed Heinz's takeover of $52 billion (market cap) Kraft Foods. Here's a look at five other names that could prove to be tempting takeover targets: OREO SNYDER'S SMUCKER'S OF HANOVE Marzetti OREO MONDELEZ NATIONAL J.M. SNYDER'S- LANCASTER INTERNATIONAL BEVERAGE SMUCKER LANCE COLONY CHIPS AHOY, OREO FAYGO, EVERFRESH, SMUCKER'S, FOLGERS, SNYDER'S, LANCE, JAYS MARZETTI, NEW YORK PHILADELPHIA, RITZ SUNDANCE NATURALS PILLSBURY, CRISCO SNACKS, STELLA D'ORO BRAND, SISTER SCHUBERT'S 1-YEAR SALES -3.0% -3.2% GROWTH -4.9% -8.0% -10.7% P/E RATIO 29.2 23.6 21.3 1 1.8 27.5 CURRENT SHARE PRICE $37.4 $24.8 $115.6 $32.1 $96 5-YEAR PRICE HIGH $42.5 (10/1/12) $26.8 (11/13/14) $117.2 (4/6/15) $32.4 (4/6/15) $99.4 (3/31/14) OPERATING MARGIN 12.3% 11.1% 17.1% 6.9% 13.7% DIVIDEND YIELD 1.6% 0% 2.2% 2% 1.9% Hostess finally died on Nov. 16, 2012 after the baker's union of products and capitalizing on the rare place in pop culture pulled the plug with an ill-conceived nationwide strike. Host- Hostess products still held. "People walk up and thank me for ess' roots went back more than 150 years. It left behind 36 bringing back Twinkies," says Metropoulos, who has previ- factories, 5,600 delivery routes and 19,000 jobs, creating some- ously rebuilt brands like Bumble Bee Tuna, Chef Boyardee thing of a national mourning, not just for the brands but also and Pabst Blue Ribbon. "No one ever thanked me for saving for what the demise seemed to say about the country itself. Vlasic pickles." Others thought Hostess got what it deserved. After all Hostess products-preservative-packed calorie bombs with he history of Hostess is anything but short and ingredients that read like a chemistry textbook-flew in the sweet. The company dates back to 1849, when face of food trends that favored farmers' markets over facto- Ward Baking Co. opened a single shop in lower ries. It looked like Hostess, a Frankenfood fossil from a chop- T Manhattan. Ward gradually acquired regional and-potato-era that nutritionists would like to forget, had players, changing its name to Continental Bak- finally hit its expiration date. eries in 1925. It bought Wonder Bread maker Taggart around But while you wouldn't find Twinkies on Whole Foods' the same time. The Twinkie was born in 1930 from Depres- shelves or in Gwyneth Paltrow's pantry, Hostess had some- sion-era efficiency: James Dewar, an employee at a Chicago- thing you can't find in a locally sourced, chia-seed snack-mil- area plant, needed something to do with unused strawberry lions of nostalgic fans. "The brand awareness was unbeliev- shortcake pans when the fruit was out of season. able," says Jhawar. "It's not every day you have an opportunity Early Twinkies were stuffed with banana cream until a to acquire a brand that is ubiquitous, that had $1 billion in banana shortage in World War II forced the switch over to revenue before the bankruptcy and 80-plus years of legacy." vanilla. Ads on The Howdy Doody Show and in Batman com- Acquire they did, plunking down $410 million for the ics made Twinkies a postwar cultural staple. So did murder. cake brands and promising to inject another $250 million to When Dan White assassinated San Francisco Mayor George rehabilitate the business. Now, just two years after buying the Moscone and City Supervisor Harvey Milk, a gay rights icon, shuttered company, they sit atop what will likely be a $2 bil- in 1978, his lawyers argued that sugar-laden junk food helped lion win. "They've worked magic with their business concept stoke his insanity-the "Twinkie Defense" was born. and have made Hostess one of the most efficient and effective By then the baker was owned by International Telephone NIEL ACKER / BLOOMBERG companies in the entire food industry," says Joseph Gatto, a & Telegraph, a massive New York conglomerate that once partner at Perella Weinberg, who brokered the sale to Metro- nvested in a firm that built warplanes for the Nazis. It had poulos and Apollo. bought Hostess in 1968 to add to its tangle of companies that How they'd do it? Cherry-picking top assets, modern- included everything from Avis Car Rental and Sheraton Ho- izing manufacturing and distribution, doubling the shelf life tels to South American telecoms and a Navy weapon systems 76 | FORBES MAY 4, 2015REINVENTING AMERICA: TWINKIES University's Kelley School of Business who has CHAT N 1026 studied Hostess' operations. "They were buying time for the status quo and failed to address the real issues with the company." The massive recession didn't help. By Janu- ary 2012 Hostess was in Chapter 11 again, and by summer Hostess was running an operating loss of $1.06 billion, with $2.47 billion in sales and $2.5 billion in liabilities. Pension expenses topped $930 million. Management called for more union concessions. The bakers union staged a strike. For weeks Hostess became a soap opera that those with agendas tried to turn into a parable, whether about a lack of U.S. innovation, the last stand of or- ganized labor or the revenge of American obesity. With private equity owner Ripplewood now underwater, its equity value wiped out in the bankruptcy, the debt-holding hedge funds weren't interested in any such hand-wringing. They just wanted their money back. With the unions myopically unwilling to make concessions neces- sary to make Hostess viable, the debt-holders shuttered it, engendering those "end of an era" Sweet returns: Andy Jhawar cooks up Apollo Global's food and retail plays. editorials nationwide. With far less fanfare, in the manufacturer. In 1984 ITT unloaded Hostess to Ralston Puri- hope of recovering some of their $360 million, the na for $475 million. In 1995 Purina sold it to Interstate Baker- hedge funds held a Chapter 7 bake sale. ies for $560 million. That deal created the largest baker in the U.S., with $3.2 billion in sales and eventually 58 factories, 1,250 W Then Andy Jhawar heard of the Hostess outlet stores and 10,500 delivery routes. iquidation, his first call was to C. Dean The business soon grew stale. Sales dropped as health-con- Metropoulos, a 68-year-old special- scious consumers shunned carbs-Sno Balls weren't exactly ist in turning battered food brands part of the Atkins Diet. Missed earnings in October 1998 sent into tidy profits. Over 35 years he had shares down 25% in one day. Meanwhile, pension costs and rehabbed dozens of businesses, from PAM cooking spray to commodity prices climbed. While competitors modernized Pabst Blue Ribbon-in 2000 FORBES dubbed him Mr. Shelf manufacturing and switched to warehouse-based shipping, Space-creating an estimated $2.2 billion fortune for himself. Hostess bandaged old machines and stuck to its cash-burn- Food was in his blood: His father farmed in Greece before ing store-by-store delivery network. By the spring of 2004 moving the family to Watertown, Mass. when young Dean debt topped $700 million. Interstate filed for Chapter 11 in was 10 years old. Metropoulos earned a B.A. and an M.B.A. September 2004. And in Chapter 11 it stayed-for almost five at Babson College, and pursued a Ph.D. in international years. Over that time the workforce was trimmed to 25,000 finance at Columbia while working at General Telephone & from 32,000, eight factories were closed and unions agreed to Electronics (which would merge with Bell Atlantic to form severe benefit cuts. Verizon). He decided he liked business better than books, Interstate came out of bankruptcy in early 2009 with ditching Columbia for a real-world Ph.D. at GTE's European a new owner-New York private equity firm Ripplewood unit. "I used to travel 30 days a month and worked in 75 to Holdings, which paid $130 million for control of the com- 80 countries." There was telecom in Mexico, Argentina and pany-and a new name, Hostess Brands Inc. What wasn't Iran; lighting in Italy; television tubes in Germany; joint ven- new: the high pension expenses (the health bill for retired tures in India, Japan and Australia. employees was more than it was for current employees), the At age 32 he made his first American acquisition-a cheese inefficient delivery system and a massive debt load (hedge company in his wife's native Vermont. He bought two other funds Silver Point and Monarch ponied up the majority of cheesemakers and flipped the business. Cheese taught him an the $360 million worth of senior loans). "How many compa- important lesson. "Food brands have a different connection JAMIE KRIPKE FOR FORBES nies come out of bankruptcy with more debt than when they with people, unlike, say, a lightbulb company," says Metropou- went in?" says W. Todd Roberson, a professor at Indiana los. In the 1990s he teamed with Dallas private equity firm 78 | FORBES MAY 4, 2015REINVENTING AMERICA: TWINKIES TIME TO MAKE THE TWINKIES The rejuvenated Hostess bakery in Emporia, Kans. whips up more than 1 million Twinkies a day-and over 400 million a year. Below, Dean Metropoulos shares his family recipe for making one of America's guiltiest pleasures. Total time: 24 hours. Makes: 1,000,000 servings. 1 2 3 4 5 Stir 50-pound bags of Add batter to endless flow With 216-nose hydraulic To prevent Twinkie traffic In two seconds, cover and Twinkie mix (flour, sugar, of greased, 72-cake Twinkie cream-injector, stuff 72 jam, use laser guidance sys heat-seal individual cakes in salt, xanthan gum and much pans. Bake at 400 degrees golden cakes with vanilla tem to align cakes as they plastic wrappers. Use high- more!) into a 2,000-gallon for 15 minutes in $20 million filling. Estimated time: one zip by on conveyer belt. tech robot arm to box. Serve mixer with water, corn syrup Auto-Bake Serpentine oven. second. within 65 days. and vegetable glycerin. Cool with industrial fans. Hicks, Muse, Tate & Furst, buying unloved food businesses. ers, in addition to Twinkies and CupCakes) and the longest In 1996, with Hicks' backing, he acquired International Home shelf life. They signed nondisclosure agreements with Hostess Foods, using it as a platform to scoop up classic brands like banker Perella Weinberg, dug through documents and visited Dennison's Chili, Bumble Bee Tuna and Chef Boyardee. actories in California, Kansas, Illinois and Indiana. They built His two sons, Evan and Daren, joined Metropoulos in the a business plan from scratch and bid $410 million-4.1 times family business early. As young boys, they say, they got tossed the $100 million in Ebitda they forecast to make in the first from stores for rearranging the family's brands on the shelves, year of operation. An additional $250 million would go into and as teenagers they convinced Dad to market Chef Boyar- rehabbing the company. Closing costs and lawyer fees would dee with WWF wrestling. "It transformed the brand," Metro- add another $20 million or so, for a total outlay of about $680 poulos says with a big smile. "We'd shoot commercials with million. Apollo put in about $140 million in equity, Metropou- stars like Mankind and Steve Austin pitching jumbo meatballs los $40 million-a $500 million debt offering covered the rest. for hungry teenagers. The Rock would sleep at our house." They expected others to enter the auction. No one else bid. About a decade later Evan and Daren persuaded Dad to pur- 'It was the risk. This was a rare circumstance in history when chase hipster beer brewer Pabst. The sons served as co-CEOs. you see a company go completely off the shelves and have no In 2014 the family sold it to Oasis Beverage for an estimated employees, have empty factories and no working capital," says $750 million-tripling their money in three years. Jhawar. "We saw the opposite-this was an opportunity to Metropoulos and Jhawar, 43, who leads Apollo's retail take a great brand and for the first time be able to reinvent it." and consumer brand deals, had first met in 2011 at the urging of Rothschild banker P.J. Moses. They had since looked into fore they could reinvent Hostess, the new potential deals in Sara Lee, Morningstar Food and Del Monte but never pulled the trigger. During their first Hostess call the pair discovered they had both independently considered buy- Metropoulos and Apollo got those cake brands, ing the company in the past but decided there were too many B wners had to rebuild it-no small thing. The deal closed in April 2013. For their $410 million the recipes and five factories. There were no legacy problems. "The way the company had been structured, employees, no marketing, no delivery routes, no shelf space- it would be difficult to transform," says Metropoulos. "I took a no sugar or cocoa or flour. No one had bought a Twinkie or a look at it and said, 'I'm not taking on all this baggage." Ding Dong for six months. Moreover, the new business plan But the liquidation had washed away everything. Yes, the called for the same output using a fraction of the labor. The company was gone, but so were the pension costs, the union old Hostess dessert division required 9,000 employees and 14 contracts and the debt. It also unbundled the brands, allow- actories to pump out just under $1 billion worth of cakes a ing investors to carve out the best businesses. "We didn't have year. The new plan called for 1,000 people and five plants (that to take on the factories or the routes," says Metropoulos. "We number was soon cut to three as one was sold, another shut JAMIE KRIPKE FOR FORBES ( 5 ) didn't have to take all the historical drags on the company." tered). William Toler, a veteran of Metropoulos turnarounds, Metropoulos and Jhawar targeted the cake business: It had was brought in as CEO. the best recognized brands (Ding Dongs, Ho-Hos and Zing- Metropoulos' recipe was threefold. First he spent $110 80 | FORBES MAY 4. 2015REINVENTING AMERICA: TWINKIES million modernizing the remaining factorieseverything from automation (massive, new $20 million AutoBakers) to improving airow in the bakeries so they'd be more toler- able for workers in the hot summer months. \"You must improve employee conditions, x the cracks on the oor and those types of things,\" says Metropoulos. \"It affects the pride, energy and culture of the plant, and that translates into everything.\" Next came a $25 million SAP software system to manage inventory and logistics. Shipping posed the biggest challenge of all. Because Won der Bread had a shelf life of only a few days, the old Hostess relied on more than 5,000 delivery routes to drop off prod uct to individual stores several times a week. It was incred- ibly expensive (each route required a driver, a truck, gas and insurance), eating up 36% of revenue each year. Worse, it limited the stores that could be reached. Gas stations and convenience stores were too small to warrant a stop. Dollar stores and pharmacies used independent distributors and were unreachable with this network. Since the new Hostess just had the cakes, not the bread, it could rethink every thing. A switch to a centralized-warehouse model would both W" E N save money and get WE SAW AL Hostess products into ROKER EATING more shops. The prob- lem: 'IWinkieswith a reputation as the cockroach of the food kingdom, able to sur vive ood, famine and nuclear warhad a TWINKIES ON TELEVISION, WE KNEW WE HAD shelf life of only about $0" ET" I N G 25 days. And since I! the warehouse model SPEC IAL' meant food might have to sit in storage as long as two weeks, even Twinkies risked going stale. The magic bullet turned out to be chemistry Metropou- los spent millions on R&D, working with food lab Corbion to tweak the formula of starches, oils and gums in Twinkies, nally arriving at an acidity level that would prevent staleness and discoloration. The singular goal: Make the Twinkie ware- house-friendly. And while none of this will make Alice Waters' heart utter, the team succeeded in making the indestructible snack even more soit's shelf life was more than doubled, to 65 days. Hostess switched to a warehouse system. Delivery costs dropped to 16% from 36% of revenue, and Hostess' retail reach expanded greatly. \"We now ship to all WalMarts, dollar stores, 100,000 convenience stores, plus vending machines and food services,\" says J hawar. \"There is no reason why Hostess can't be sold in any place that sells candy bars\" 82 I FORBES MAY4,2015 11 July of 2013less than four months after Met ropoulos and Apollo took over operationsthe Twinkie was back. Just like its death, news of Host ess' rebirth blew up the Internet, social networks and television. Twinkies were on Jimmy Fallon and the Ellen show. During the Today show Al Roker shot a threeminute spot riding shotgun in a Hostess truck and then tossing Twinkies to screaming fans. \"When we saw Al Roker eating Twinkies on national television, we knew we had something special,\" says Evan Metropoulos. \"The free exposure we got from the media was incrediblethey started pitching us stories.\" To feed the re, Evan and Daren Metropoulos tapped celebrity friends like Will Farrell, Snoop Dog and Howard Stern to hawk Hostess. They built a giant countdown clock in Times Square. Marketing teams ooded college campuses, throwing parties with Twinkies and Pabst beer, creating a ton of viral content for social networks. And Hostess' brief earlier demise was the best marketing tool of all. Says Dean Metro- poulos: \"My suspicion is that if Hostess hadn't gone out of business, if we had just taken it over while it was still running, we wouldn't have gotten this reception.\" Fans ocked to stores. Demand was so high that large retailers waived the slotting fees they usually charge brands for shelf space. The Metropoulos and Apollo business plan had predicted $100 million worth of Ebitda for 2014Ain stead they hit $178 million. Those numbers make Hostess' $410 million price tag look dirt cheap2.3 times Ebitda in an industry where companies get 12 times. Hostess is on track to top $200 million in Ebitda this yearwhich, looking at comparable businesses like Flowers Foods, values Host ess north of $2.5 billion. Take out what's left of the $500 million they borrowed to buy the company and Metropou- los and Apolloif all goes according to plancould make $2 billion on a $180 million equity investment in just two years. \"What they've done at Hostess should be a Harvard Busi- ness School case study on how to turn around a business,\" says Gatto, the Perella banker. Metropoulos won't comment on a potential exit, saying only that a sale or an IPO is in the cards. Meanwhile, several sources say he and Apollo are already shopping the com- pany. Pitch books lled with comps like Hershey's and Mondelez went out to a handful of major players, includ- ing Grupo Bimbo and Flowers, in early April. While that unfolds, Metropoulos is eyeing hipper versions of Hostess classics, with avors like sea salt caramel and red velvet. He's also targeting new customers, especially the fast-grow- ing Hispanic market. And then at some point, with the story of the Twinkie established as management triumph rather than tragedy, he'll move on to the next mismanaged brand. \"we've had almost 80 businesses, and they've all worked out very well,\" he says. \"That just fuels my energy to do the next one.\" 9