Kevin Lavin, Global Co-Leader, FTI Consulting
Kevin Lavin,
Global Co-Leader,
FTI Consulting

“What’s in a name? That which we call a rose
By any other name would smell as sweet.”
— Romeo and Juliet, Act II, Scene II

These timeless words spoken by Juliet Capulet to her lover Romeo convey her sentiment that his dreaded Montague surname is but an arbitrary and meaningless label to her; what matters is the essence of the man she has fallen in love with, regardless of what he is called by name. The Bard of Avon may have been the greatest playwright ever, but we’re not sure he would have cut it as a modern day brand manager with such sentiments.

Names do matter a great deal in business because they are a potent form of shorthand that convey distinct impressions or attributes to an audience. Companies spend billions each year developing brand names and associated messaging. Increasingly we hear of individuals, primarily athletes and celebrities, referred to as brands and some speak openly about “building their brand.” There’s a tendency to be dismissive of such puffery until one fully grasps the enormity of the dollars at stake. Just ask Dr. Dre (née Andre Young), who has parlayed his wide renown as a rapper and record producer to create the hugely successful Beats Electronics premium audio products business in less than five years, primarily under the brand name Beats by Dr. Dre. His reputation within the music recording industry and his fame among legions of hip hop fans provided Beats with a distinct competitive advantage from its inception in 2008 despite a crowded marketplace for audio accessories. In marketing parlance Dr. Dre was extending his brand. Beats’ recent repurchase of a minority ownership stake implied a value for the company in excess of $1 billion. Now that’s brand power.

Case Study: Hostess Brands

The recently completed auction sale of Hostess Brands’ businesses for amounts well in excess of earlier estimates again remind us of the huge economic value embedded in established brand names, trademarks and other such intangibles — value that buyers often are willing to pay top dollar for when they become available.
The failure of Hostess Brands to reorganize as a unified going concern contained some elements of a Shakespearean tragedy: ghosts from the past, hubris, intrigue and high drama leading up to a frenzied denouement. But did anyone ever doubt that Twinkies, Wonder Bread and other venerable names in the Hostess Brands stable would eventually return to store shelves in some manner? Despite years of operating losses caused by a variety of factors, Hostess’ many iconic brands and the goodwill they engendered with generations of faithful customers had tremendous appeal and economic value to a motivated buyer. Corporate bankruptcy professionals recognize that storied brands rarely die forever in bankruptcy; they typically live on in some form and can be rejuvenated by new owners.

Hostess Brands filed for bankruptcy in January 2012, less than three years after its predecessor entity, Interstate Bakeries, emerged from a four-year stint in Chapter 11. (A name change no doubt meant to boost awareness of its umbrella brand.) Hostess reported a net loss of $341 million in 2011 on sales of nearly $2.5 billion. Virtually all its assets were encumbered by nearly $900 million of secured debt at the time of its second filing, much of which originated upon its 2009 emergence from Chapter 11. The debtor also obtained $75 million of superpriority DIP financing in February 2012. Hostess Brands intended to reorganize again but a crippling strike by its bakery union members authorized shortly after the debtor’s filing of its joint plan of reorganization in October 2012 caused Hostess to a file an emergency motion to wind down its business, which was granted by Judge Robert Drain on November 30, 2012. Hostess Brands’ businesses were subsequently auctioned off via a §363 auction process that began in early 2013.

Auction Highs and Lows

Within fourth months of getting its wind-down motion approved, Hostess Brands had auctioned off its primary businesses to separate buyers for gross proceeds in excess of $850 million, with Flowers Foods winning five bread brands, including Wonder Bread for $350 million, and a venture between Metropoulos & Co. and Apollo Global Management getting its snack food business for $410 million. Its Beefsteak bread and Drake Cakes brands were sold off separately for approximately $60 million in total, while a collection of unwanted properties — including several bakeries, distribution centers, delivery trucks, depots and some retail stores — fetched more than $62 million in August. The auction process of Hostess Brands’ businesses was very robust and hugely successful, with gross proceeds exceeding previous valuation estimates by about 80%.

Flowers Foods and Metropoulos/Apollo, the two winning bidders for most of Hostess Brands’ businesses, didn’t pony up that kind of money for profitable enterprises (Hostess Brands remained operationally unprofitable even after it emerged from bankruptcy in 2009), though both buyers surely recognized the potential to quickly remedy many of its operating inefficiencies under new ownership. Nor were its plants and equipment a source of such high value; its bakeries suffered from underinvestment for years and many would need to be upgraded and modernized by its new owners. Eight of its 33 bakeries were not taken by going concern buyers of its bread and snack foods businesses, nor were many depots and thousands of delivery vehicles. The distribution and delivery systems of its purchasers could reach more stores and outlets more efficiently than Hostess Brands’ incumbent routing systems.

Brand Power

Plain and simple, it was the value of Hostess’s brands, many dating back to the pre-WWII era, which attracted these buyers. Flowers Foods ascribed $193 million — or 55% of its purchase price for Hostess bread brands — to identifiable intangible assets, mainly trademarks. Metropoulos/Apollo has already indicated it will invest in R&D to come up with healthier versions of its Hostess snack foods — something its predecessor owner couldn’t afford to undertake even as the nation became more health conscious. The strong brand platform it acquired increases the likelihood that customers will embrace these product innovations. Hostess bread and snack food products made by its new owners began returning to store shelves in mid-summer and all indications are that retail demand has been incredibly strong following an eight- month absence. Twinkie lovers have rejoiced.

Secured lenders that financed Hostess’ emergence from bankruptcy in 2009 must also be pleased with this outcome as a vast majority of Hostess’ secured obligations have been repaid, including its pre-petition ABL, its post-petition DIP facility, some $400 million in first lien debt and $175 million of third lien debt. (First lien lenders had a second priority lien on property covered by the ABL and a first lien position on all Hostess’s other assets.) Even fourth lien note holders, part of which was held by its former PE owner, have received a modest recovery through September. Few could have imagined a full recovery scenario for most secured lenders only a year ago when Hostess’ operating businesses were shut down. To that point, one report indicated that certain key pre-petition lenders to Hostess had already significantly written down these investments.

Similar Stories

We have seen some version of this story several times in recent years, though not necessarily with such a favorable outcome for senior lenders. Failed or failing enterprises that are considered irreparable under one owner can still be coveted targets as going concerns to a prospective buyer, provided they have widely recognized brands. The bankruptcy process, or the prospect of it, has an inherent way of enabling economically exploitable assets to be extricated and endure in some capacity, providing recovery value, often sizeable, to senior creditors. Typically these values will comfortably exceed likely recovery values under a strict asset liquidation scenario.

Back in 2009 the owners of Stella D’oro Holdings, the renowned New York-based biscuit maker, carried through on a threat to shut down after unsuccessful and contentious disputes with labor unions over wage concessions. After months of failed negotiations, it sold the business, consisting of its brands, recipes, inventory and some manufacturing equipment to Lance Inc. (nka Snyder’s-Lance) for $24 million, nearly 75% of which was ascribed to intangible assets. Lance promptly moved all production to its bakery in Ashland, OH, and Stella D’oro’s Bronx bakery soon closed after nearly 80 years in business. Today Stella D’oro products are as ubiquitous as ever on supermarket shelves, and we suspect customers don’t detect any difference in the quality of its famous biscuits and breadsticks. Lance’s vast distribution network is getting Stella D’oro products into stores and regions it couldn’t easily access previously. Lance had previously purchased the assets of Tom’s Foods and Archway Cookies out of bankruptcy for nearly $70 million in total, acquiring a stable of established private label and branded baked goods and snacks that continue to fill supermarket shelves today.

Another well-recognized consumer brand that failed only to live again is Sharper Image, which filed for bankruptcy in 2008, closed all of its nearly 200 stores and was liquidated. But in 2011 the Sharper Image brands and intellectual property were sold by its winning auction bidders for $65 million to Iconix Brand Group, which now licenses the brand to third parties and operates the Sharper Image website. Iconix has developed an entire business model around acquiring and resurrecting faded brands, such as its 2006 purchase of London Fog via a sale in bankruptcy. Iconix assumes no inventory or manufacturing risks; it provides marketing support for its brands and licenses them in exchange for royalty payments. Many of these brands have newfound popularity in foreign markets, especially in Asia.

Suffice it to say that the bankruptcy process helps ensure that valuable brand assets trapped within broken enterprises can be disentangled, monetized and revitalized for the benefit of many, including creditors. Buyers who pay dear value for these assets presumably will be responsible stewards of them and would likely have the resources to nurture them in ways that their predecessor owners were lacking. But it all begins with the brands, and lenders shouldn’t overlook their potential value in the process of formulating lending strategies and terms.

Kevin Lavin is global co-leader of the FTI Consulting Corporate Finance/Restructuring practice. He is also a member of the firm’s executive committee.