Twinkie’s Miracle Comeback: The Untold, Inside Story of a $2 Billion Feast

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Source: Forbes Technology

With ingenuity, capital, and creative chemistry, billionaire C. Dean Metropoulos and Apollo Global’s Andy Jhawar rescued Hostess Brands–and set themselves up to feast on a $2 billion gain.

Walk in the door of Hostess Brands’ flagship bakery in Emporia, Kansas 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 Cup Cakes 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 Cup Cakes, 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 manufacturing. After over a decade of failing health that saw two bankruptcies and five different CEOs, Hostess finally died on Nov. 16, 2012 after the baker’s union pulled the plug with an ill-conceived nationwide strike. Hostess’ roots went back more than 150 years. It left behind 36 factories, 5,600 delivery routes and 19,000 jobs, creating something of a national mourning, not just for the brands but also for what the demise seemed to say about the country itself.

Others thought Hostess got what it deserved. After all, Hostess products–preservative-packed calorie bombs with ingredients that read like a chemistry textbook–flew in the face of food trends that favored farmers’ markets over factories. It looked like Hostess, a Frankenfood fossil from a chop-and-potato-era that nutritionists would like to forget, had finally hit its expiration date.

Cake Boss: C. Dean Metropoulos turns busted brands into blockbusters.

But while you wouldn’t find Twinkies on Whole Foods’ shelves or in Gwyneth Paltrow’s pantry, Hostess had something you can’t find in a locally sourced, chia–seed snack–millions of nostalgic fans. “The brand awareness was unbelievable,” says Jhawar. “It’s not every day you have an opportunity to acquire a brand that is ubiquitous, that had $1 billion in revenue before the bankruptcy and 80–plus years of legacy.”

Acquire they did, plunking down $410 million for the cake brands and promising to inject another $250 million to rehabilitate the business. Now, just two years after buying the shuttered company, they sit atop what will likely be a $2 billion win. “They’ve worked magic with their business concept and have made Hostess one of the most efficient and effective companies in the entire food industry,” says Joseph Gatto, a partner at Perella Weinberg, who brokered the sale to Metropoulos and Apollo.

How they’d do it? Cherry–picking top assets, modernizing manufacturing and distribution, doubling the shelf life of products and capitalizing on the rare place in pop culture Hostess products still held. “People walk up and thank me for bringing back Twinkies,” says Metropoulos, who has previously rebuilt brands like Bumble Bee Tuna, Chef Boyardee and Pabst Blue Ribbon. “No one ever thanked me for saving Vlasic pickles.”

The history of Hostess is anything but short and sweet. The company dates back to 1849, when Ward Baking Co. opened a single shop in lower Manhattan. Ward gradually acquired regional players, changing its name to Continental Bakeries in 1925. It bought Wonder Bread maker Taggart around the same time. The Twinkie was born in 1930 from Depression-era efficiency: James Dewar, an employee at a Chicago-area plant, needed something to do with unused strawberry shortcake pans when the fruit was out of season.

Early Twinkies were stuffed with banana cream until a banana shortage in World War II forced the switch over to vanilla. Ads on The Howdy Doody Show and in Bat man comics made Twinkies a postwar cultural staple. So did murder. When Dan White assassinated San Francisco Mayor George Moscone and City Supervisor Harvey Milk, a gay rights icon, in 1978, his lawyers argued that sugar-laden junk food helped stoke his insanity–the “Twinkie Defense” was born.

By then the baker was owned by International Telephone & Telegraph, a massive New York conglomerate that o nce invested in a firm that built warplanes for the Nazis. It had bought Hostess in 1968 to add to its tangle of companies that included everything from Avis Car Rental a nd Sheraton Hotels to South American telecoms and a Navy weapon systems manufacturer. In 1984 ITT unloaded Hostess to Ralston Purina for $475 million. In 1995 Purina sold it to Interstate Bakeries 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 outlet stores and 10,500 delivery routes.

The business soon grew stale. Sales dropped as health-conscious consumers shunned carbs–Sno Balls weren’t exactly part of the Atkins Diet. Missed earnings in October 1998 sent shares down 25% in one day. Meanwhile, pension costs and commodity prices climbed. While competitors modernized manufacturing and switched to warehouse-based shipping, Hostess bandaged old machines and stuck to its cash-burning store-by-store delivery network. By the spring of 2004 debt topped $700 million. Interstate filed for Chapter 11 in September 2004. And in Chapter 11 it stayed–for almost five years. Over that time the workforce was trimmed to 25,000 from 32,000, eight factories were closed and unions agreed to severe benefit cuts.

Interstate came out of bankruptcy in early 2009 with a new owner–New York private equity firm Ripplewood Holdings, which paid $130 million for control of the company–and a new name, Hostess Brands Inc. What wasn’t new: the high pension expenses (the health bill for retired employees was more than it was for current employees), the inefficient delivery system and a massive debt load (hedge funds Silver Point and Monarch ponied up the majority of the $360 million worth of senior loans). “How many companies come out of bankruptcy with more debt than when they went in?” says W. Todd Roberson, a professor at Indiana University’s Kelley School of Business who has 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 January 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 organized 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 necessary to make Hostess viable, the debt–holders shuttered it, engendering those “end of an era” editorials nationwide. With far less fanfare, in the hope of recovering some of their $360 million, the hedge funds held a Chapter 7 bake sale.

When Andy Jhawar heard of the Hostess liquidation, his first call was to C. Dean Metropoulos, a 68–year-old specialist in turning battered food brands into tidy profits. Over 35 years he had rehabbed dozens of businesses, from PAM cooking spray to Pabst Blue Ribbon–in 2000 FORBES dubbed him Mr. Shelf Space–creating an estimated $2.2 billion fortune for himself. Food was in his blood: His father farmed in Greece before moving the family to Watertown, Mass. when young Dean was 10 years old. Metropoulos earned a B.A. and an M.B.A. at Babson College, and pursued a Ph.D. in international finance at Columbia while working at General Telephone & Electronics (which would merge with Bell Atlantic to form Verizon). He decided he liked business better than books, ditching Columbia for a real–world Ph.D. at GTE’s European unit. “I used to travel 30 days a month and worked in 75 to 80 countries.” There was telecom in Mexico, Argentina and Iran; lighting in Italy; television tubes in Germany; joint ventures in India, Japan and Australia.

At age 32 he made his first American acquisition–a cheese company in his wife’s native Vermont. He bought two other cheese makers and flipped the business. Cheese taught him an important lesson. “Food brands have a different connection with people, unlike, say, a light bulb company,” says Metropoulos. In the 1990s he teamed with Dallas private equity firm Hicks, Muse, Tate & Furst, buying unloved food businesses. In 1996, with Hicks’ backing, he acquired International Home Foods, using it as a platform to scoop up classic brands like Dennison’s Chili, Bumble Bee Tuna and Chef Boyardee.His two sons, Evan and Daren, joined Metropoulos in the family business early. As young boys, they say, they got tossed from stores for rearranging the family’s brands on the shelves, and as teenagers they convinced Dad to market Chef Boyardee with WWF wrestling. “It transformed the brand,” Metropoulos says with a big smile. “We’d shoot commercials with stars like Mankind and Steve Austin pitching jumbo meat balls for hungry teenagers. The Rock would sleep at our house.” A bout a decade later Evan and Daren persuaded Dad to purchase hipster beer brewer Pabst. The sons served as co-CEOs. In 2014 the family sold it to Oasis Beverage for an estimated $750 million–tripling their money in three years.

Metropoulos and Jhawar, 43, who leads Apollo’s retail and consumer brand deals, had first met in 2011 at the urging of Rothschild banker P.J. Moses. They had since looked into 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 buying the company in the past but decided there were too many legacy problems. “The way the company had been structured, it would be difficult to transform,” says Metropoulos. “I took a look at it and said,’I’m not taking on all this baggage.’ ”

But the liquidation had washed away everything. Yes, the company was gone, but so were the pension costs, the union contracts and the debt. It also unbundled the brands, allowing investors to carve out the best businesses. “
We didn’t have to take on the factories or the routes,” says Metropoulos. “We didn’t have to take all the historic al drags on the company.”

Metropoulos and Jhawar targeted the cake business: It had the best recognized brands (Ding Dongs, Ho-Hos and Zingers, in addition to Twinkies and CupCakes ) and the longest shelf life. They signed non disclosure agreements with Hostess banker Perella Weinberg, dug through documents and visited factories in California, Kansas, Illinois and Indiana. They built a business plan from scratch and bid $410 million–4.1 times t he $100 million in E bitda they forecast to make in the first year of operation. An additional $250 million would go into rehabbing the company. Closing costs and lawyer fees would add another $20 million or so, for a total outlay of about $680 million. Apollo put in about $140 million in equity, Metropoulos $40 million–a $500 million debt offering covered the rest.

They expected others to enter the auction. No one else bid. “It was the risk. This was a rare circumstance in history when you see a company go completely off the shelves and have no employees, have empty factories and no working capital,” says Jhawar. “We saw the opposite–this was an opportunity to take a great brand and for the first time be able to reinvent it.”

Sweet Returns: Andy Jhawar cooks up Apollos’ food and retail deals.

Before they could reinvent Hostess, the new owners had to rebuild it–no small thing. The deal closed in April 2013. For their $410 million Metropoulos and Apollo got those cake brands, the recipes and five factories. There were no employees, no marketing, no delivery routes, no shelf space–no sugar or cocoa or flour. No one had bought a Twinkie or a Ding Dong for six months. Moreover, the new business plan called for the same output using a fraction of the labor. The old Hostess dessert division required 9,000 employees and 14 factories to pump out just under $1 billion worth of cakes a year. The new plan called for 1,000 people and five plants (that number was soon cut to three as one was sold, another shuttered). William Toler, a veteran of Metropoulos turnarounds, was brought in as CEO.

Metropoulos’ recipe was threefold. First he spent $110 million modernizing the remaining factories–everything from a utomation (massive, new $20 million Auto Bakers) to improving air flow in the bakeries so they’d be more tolerable for workers in the hot summer months. “You must improve employee conditions, fix the cracks on the floor 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 Wonder Bread had a shelf life of only a few days, the old Hostess relied on more than 5,000 delivery routes to drop off product to individual stores several times a week. It was incredibly expensive (each route required a driver, a truck, gas and insurance), eating up 36% of revenue each year. Worse, it limited the stores that c ould be reach ed. 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 everything. A switch to a centralized–warehouse model would both save money and get Hostess products into more shops. The problem: Twinkies–with a reputation as the cockroach of the food kingdom, able to survive flood, famine and nuclear war–had a shelf life of only about 25 days. And since the warehouse model 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. Metropoulos spent millions on R&D, working with food lab Corbion to tweak the formula of starches, oils and gums in Twinkies, finally arriving at an acidity level that would prevent staleness and discoloration. The singular goal: Make the Twinkie warehouse-friendly. And while none of this will make Alice Waters’ heart flutter, the team succeeded in making the indestructible snack even more so–it’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 Wal-Marts, dollar stores, 100,000 convenience stores, plus vending machines and food services,” says Jhawar. “There is no reason why Hostess can’t be sold in any place that sells candy bars.”

Junk Food Billionaires

In July of 2013–less than four months after Metropoulos and Apollo took over operations–the Twinkie was back. Just like its death, news of Hostess’ 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 three–minute 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 incredible–they started pitching us stories.”

To feed the fire, Evan and Daren Metropoulos tapped celebrity friends like Will Farrell, Snoop Dogg and Howard Stern to hawk Hostess. They built a giant countdown clock in Times Square. Marketing teams flooded 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 Metropoulos: “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 flocked 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 2014–instead they hit $178 million. Those numbers make Hostess’ $410 million price tag look dirt cheap–2.3 times Ebitda in an industry where companies get 12 times. Hostess is on track to top $200 million in Ebitda this year–which, looking at comparable businesses like Flowers Foods, values Hostess north of $2.5 billion. Take out what’s left of the $500 million they borrowed to buy the company and Metropoulos and Apollo–if all goes according to plan–could make $2 billion on a $180 million equity investment in just two years. “What they’ve done at Hostess should be a Harvard Business 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 company. Pitch books filled with comps like Hershey’s and Mondelez went out to a handful of major players, including Grupo Bimbo and Flowers, in early April. While that unfolds, Metropoulos is eyeing hipper versions of Hostess classics, with flavors like sea salt caramel and red velvet. He’s also targeting new customers, especially the fast-growing 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.”

How they’d do it? Cherry–picking top assets, modernizing manufacturing and distribution, doubling the shelf life of products and capitalizing on the rare place in pop culture Hostess products still held. “People walk up and thank me for bringing back Twinkies,” says Metropoulos, who has previously rebuilt brands like Bumble Bee Tuna, Chef Boyardee and Pabst Blue Ribbon. “No one ever thanked me for saving Vlasic pickles.”

The history of Hostess is anything but short and sweet. The company dates back to 1849, when Ward Baking Co. opened a single shop in lower Manhattan. Ward gradually acquired regional players, changing its name to Continental Bakeries in 1925. It bought Wonder Bread maker Taggart around the same time. The Twinkie was born in 1930 from Depression-era efficiency: James Dewar, an employee at a Chicago-area plant, needed something to do with unused strawberry shortcake pans when the fruit was out of season.

Early Twinkies were stuffed with banana cream until a banana shortage in World War II forced the switch over to vanilla. Ads on The Howdy Doody Show and in Bat man comics made Twinkies a postwar cultural staple. So did murder. When Dan White assassinated San Francisco Mayor George Moscone and City Supervisor Harvey Milk, a gay rights icon, in 1978, his lawyers argued that sugar-laden junk food helped stoke his insanity–the “Twinkie Defense” was born.

By then the baker was owned by International Telephone & Telegraph, a massive New York conglomerate that o nce invested in a firm that built warplanes for the Nazis. It had bought Hostess in 1968 to add to its tangle of companies that included everything from Avis Car Rental a nd Sheraton Hotels to South American telecoms and a Navy weapon systems manufacturer. In 1984 ITT unloaded Hostess to Ralston Purina for $475 million. In 1995 Purina sold it to Interstate Bakeries 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 outlet stores and 10,500 delivery routes.

The business soon grew stale. Sales dropped as health-conscious consumers shunned carbs–Sno Balls weren’t exactly part of the Atkins Diet. Missed earnings in October 1998 sent shares down 25% in one day. Meanwhile, pension costs and commodity prices climbed. While competitors modernized manufacturing and switched to warehouse-based shipping, Hostess bandaged old machines and stuck to its cash-burning store-by-store delivery network. By the spring of 2004 debt topped $700 million. Interstate filed for Chapter 11 in September 2004. And in Chapter 11 it stayed–for almost five years. Over that time the workforce was trimmed to 25,000 from 32,000, eight factories were closed and unions agreed to severe benefit cuts.

Interstate came out of bankruptcy in early 2009 with a new owner–New York private equity firm Ripplewood Holdings, which paid $130 million for control of the company–and a new name, Hostess Brands Inc. What wasn’t new: the high pension expenses (the health bill for retired employees was more than it was for current employees), the inefficient delivery system and a massive debt load (hedge funds Silver Point and Monarch ponied up the majority of the $360 million worth of senior loans). “How many companies come out of bankruptcy with more debt than when they went in?” says W. Todd Roberson, a professor at Indiana University’s Kelley School of Business who has 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 January 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 organized 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 necessary to make Hostess viable, the debt–holders shuttered it, engendering those “end of an era” editorials nationwide. With far less fanfare, in the hope of recovering some of their $360 million, the hedge funds held a Chapter 7 bake sale.

When Andy Jhawar heard of the Hostess liquidation, his first call was to C. Dean Metropoulos, a 68–year-old specialist in turning battered food brands into tidy profits. Over 35 years he had rehabbed dozens of businesses, from PAM cooking spray to Pabst Blue Ribbon–in 2000 FORBES dubbed him Mr. Shelf Space–creating an estimated $2.2 billion fortune for himself. Food was in his blood: His father farmed in Greece before moving the family to Watertown, Mass. when young Dean was 10 years old. Metropoulos earned a B.A. and an M.B.A. at Babson College, and pursued a Ph.D. in international finance at Columbia while working at General Telephone & Electronics (which would merge with Bell Atlantic to form Verizon). He decided he liked business better than books, ditching Columbia for a real–world Ph.D. at GTE’s European unit. “I used to travel 30 days a month and worked in 75 to 80 countries.” There was telecom in Mexico, Argentina and Iran; lighting in Italy; television tubes in Germany; joint ventures in India, Japan and Australia.

At age 32 he made his first American acquisition–a cheese company in his wife’s native Vermont. He bought two other cheese makers and flipped the business. Cheese taught him an important lesson. “Food brands have a different connection with people, unlike, say, a light bulb company,” says Metropoulos. In the 1990s he teamed with Dallas private equity firm Hicks, Muse, Tate & Furst, buying unloved food businesses. In 1996, with Hicks’ backing, he acquired International Home Foods, using it as a platform to scoop up classic brands like Dennison’s Chili, Bumble Bee Tuna and Chef Boyardee.His two sons, Evan and Daren, joined Metropoulos in the family business early. As young boys, they say, they got tossed from stores for rearranging the family’s brands on the shelves, and as teenagers they convinced Dad to market Chef Boyardee with WWF wrestling. “It transformed the brand,” Metropoulos says with a big smile. “We’d shoot commercials with stars like Mankind and Steve Austin pitching jumbo meat balls for hungry teenagers. The Rock would sleep at our house.” A bout a decade later Evan and Daren persuaded Dad to purchase hipster beer brewer Pabst. The sons served as co-CEOs. In 2014 the family sold it to Oasis Beverage for an estimated $750 million–tripling their money in three years.

Metropoulos and Jhawar, 43, who leads Apollo’s retail and consumer brand deals, had first met in 2011 at the urging of Rothschild banker P.J. Moses. They had since looked into 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 buying the company in the past but decided there were too many legacy problems. “The way the company had been structured, it would be difficult to transform,” says Metropoulos. “I took a look at it and said,’I’m not taking on all this baggage.’ ”

But the liquidation had washed away everything. Yes, the company was gone, but so were the pension costs, the union contracts and the debt. It also unbundled the brands, allowing investors to carve out the best businesses. “
We didn’t have to take on the factories or the routes,” says Metropoulos. “We didn’t have to take all the historic al drags on the company.”

Metropoulos and Jhawar targeted the cake business: It had the best recognized brands (Ding Dongs, Ho-Hos and Zingers, in addition to Twinkies and CupCakes ) and the longest shelf life. They signed non disclosure agreements with Hostess banker Perella Weinberg, dug through documents and visited factories in California, Kansas, Illinois and Indiana. They built a business plan from scratch and bid $410 million–4.1 times t he $100 million in E bitda they forecast to make in the first year of operation. An additional $250 million would go into rehabbing the company. Closing costs and lawyer fees would add another $20 million or so, for a total outlay of about $680 million. Apollo put in about $140 million in equity, Metropoulos $40 million–a $500 million debt offering covered the rest.

They expected others to enter the auction. No one else bid. “It was the risk. This was a rare circumstance in history when you see a company go completely off the shelves and have no employees, have empty factories and no working capital,” says Jhawar. “We saw the opposite–this was an opportunity to take a great brand and for the first time be able to reinvent it.”

Sweet Returns: Andy Jhawar cooks up Apollos’ food and retail deals.

Before they could reinvent Hostess, the new owners had to rebuild it–no small thing. The deal closed in April 2013. For their $410 million Metropoulos and Apollo got those cake brands, the recipes and five factories. There were no employees, no marketing, no delivery routes, no shelf space–no sugar or cocoa or flour. No one had bought a Twinkie or a Ding Dong for six months. Moreover, the new business plan called for the same output using a fraction of the labor. The old Hostess dessert division required 9,000 employees and 14 factories to pump out just under $1 billion worth of cakes a year. The new plan called for 1,000 people and five plants (that number was soon cut to three as one was sold, another shuttered). William Toler, a veteran of Metropoulos turnarounds, was brought in as CEO.

Metropoulos’ recipe was threefold. First he spent $110 million modernizing the remaining factories–everything from automation (massive, new $20 million Auto Bakers) to improving air flow in the bakeries so they’d be more tolerable for workers in the hot summer months. “You must improve employee conditions, fix the cracks on the floor 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 Wonder Bread had a shelf life of only a few days, the old Hostess relied on more than 5,000 delivery routes to drop off product to individual stores several times a week. It was incredibly expensive (each route required a driver, a truck, gas and insurance), eating up 36% of revenue each year. Worse, it limited the stores that c ould be reach ed. 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 everything. A switch to a centralized–warehouse model would both save money and get Hostess products into more shops. The problem: Twinkies–with a reputation as the cockroach of the food kingdom, able to survive flood, famine and nuclear war–had a shelf life of only about 25 days. And since the warehouse model 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. Metropoulos spent millions on R&D, working with food lab Corbion to tweak the formula of starches, oils and gums in Twinkies, finally arriving at an acidity level that would prevent staleness and discoloration. The singular goal: Make the Twinkie warehouse-friendly. And while none of this will make Alice Waters’ heart flutter, the team succeeded in making the indestructible snack even more so–it’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 Wal-Marts, dollar stores, 100,000 convenience stores, plus vending machines and food services,” says Jhawar. “There is no reason why Hostess can’t be sold in any place that sells candy bars.”

Junk Food Billionaires

In July of 2013–less than four months after Metropoulos and Apollo took over operations–the Twinkie was back. Just like its death, news of Hostess’ 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 three–minute 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 incredible–they started pitching us stories.”

To feed the fire, Evan and Daren Metropoulos tapped celebrity friends like Will Farrell, Snoop Dogg and Howard Stern to hawk Hostess. They built a giant countdown clock in Times Square. Marketing teams flooded 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 Metropoulos: “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 flocked 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 2014–instead they hit $178 million. Those numbers make Hostess’ $410 million price tag look dirt cheap–2.3 times Ebitda in an industry where companies get 12 times. Hostess is on track to top $200 million in Ebitda this year–which, looking at comparable businesses like Flowers Foods, values Hostess north of $2.5 billion. Take out what’s left of the $500 million they borrowed to buy the company and Metropoulos and Apollo–if all goes according to plan–could make $2 billion on a $180 million equity investment in just two years. “What they’ve done at Hostess should be a Harvard Business 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 company. Pitch books filled with comps like Hershey’s and Mondelez went out to a handful of major players, including Grupo Bimbo and Flowers, in early April. While that unfolds, Metropoulos is eyeing hipper versions of Hostess classics, with flavors like sea salt caramel and red velvet. He’s also targeting new customers, especially the fast-growing 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.”

Source: Forbes Technology

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