LOS ANGELES — Gores Group Holdings, a private equity firm, has entered into an agreement to acquire a majority stake in Hostess Brands L.L.C., Kansas City, and plans to introduce the snack maker as a publicly traded company with an enterprise value of approximately $2.3 billion.
Under terms of the transaction, the current owners of Hostess, funds managed by affiliates of Apollo Global Management, L.L.C. and C. Dean Metropoulos and family, will receive approximately $522 million in cash. Mark R. Stone, Gores chief executive officer, offered details of the transaction in a July 5 conference call. The payment will come from $375 million in cash from Gores Holdings Inc., a publicly traded affiliate of Gores Group, and another $350 million to be raised in a private placement. The private placement will be led by Alec Gores, chairman and c.e.o. of the Gores Group, and will include $50 million in a rollover contribution from C. Dean Metropoulos, executive chairman of Hostess. Others participating in the private placement will be institutional investors and affiliates of Gores, a Los Angeles-based private equity group. The Metropoulos and Apollo groups are expected to retain a 42% stake in Hostess when the transaction is completed.
The funds also will be used to cover transaction costs and pay down $173 million in debt, bringing Hostess debt to $990 million, equating to 4.5 times fiscal 2016 (year ended May 31) EBITDA.
The remainder of what the sellers receive will consist of shares of Gores Holding common stock, expected to equate to a 42% holding of Gores.
In a Gores filing with the Securities and Exchange Commission, Gores said the private placement consists of 32.7 million Class A shares priced at $9.18 per share. The sellers also are entitled to capture 85% in net tax savings the company may realize, mostly in connection with a higher tax basis that will result from the transaction.
Terms of the transaction also gives the sellers an additional earn-out payment of up to 5.5 million shares of Gores stock, subject to hitting EBITDA targets for 2016 and 2017.
At $2.3 billion, the Hostess value equated to 10.4 times 2016 adjusted EBITDA, Gores said.
Mr. Stone called that valuation “an attractive entry point relative to comps, which currently trade at significant premiums to our entry multiple.”
Mr. Metropoulos and William Toler will continue to lead the company as executive chairman and chief executive officer, respectively.
Mr. Metropoulos will hold a pro-forma stake in the business of above $300 million, Mr. Stone said, and, according to the S.E.C. filing, may receive an earn-out of up to 2.75 million shares of Gores based on performance in fiscal 2018.
“This is a compelling alignment of interests,” Mr. Stone said. “It signals confidence from premium investors in the consumer space.”
The transaction has been approved by the boards of directors of both Gores Holdings and Hostess Brands, and is expected to close in the third quarter of 2016, subject to the receipt of regulatory approval, and approval of the stockholders of Gores Holdings. Upon closing of the transaction, the name of the company will be changed to Hostess Brands, Inc.
“This new phase in Hostess’ evolution and partnership with The Gores Group and our broader investor partners will continue to propel Hostess into a growing and innovative company with significant reach and potential long into the future,” Mr. Metropoulos said. “We are very excited to continue to build this wonderful company and its iconic brands.”
Gores Holdings, Inc. was established as a publicly traded company in August 2015, trading on Nasdaq CM. Mr. Gores said, “We are pleased to partner with Dean, Bill and Apollo to introduce Hostess as a publicly listed company. We have evaluated a number of potential acquisitions for Gores Holdings and believe this transaction offers a superior option for our stockholders. Hostess presents a unique opportunity to invest in an iconic brand with strong fundamentals that is poised for continued growth. We look forward to working with the team at Hostess as we collaborate to further capitalize on these attractive growth prospects.”
Gores Holdings makes investments in a variety of industries, ranging from automotive to fasteners. Past food industry investments include Hovis, the United Kingdom-based baking and milling business formerly majority owned by Premier Foods P.L.C.