Check Out the Insane Valuation on Twinkie-Maker Hostess Brands

Once-bankrupt Hostess Brands will soon be a publicly traded company.
By Brian Sozzi ,

A company with a horrible financial past that so happens to make nothing healthy to eat may be about to get one insane valuation by investors.

Hostess Brands, the maker of Twinkies and Sno Balls, said Monday an affiliate of private equity firm Gores Group will buy a majority stake in the company for about $725 million and bring it to the public market. The current majority owners of Hostess, Apollo Global Management and Metropoulos, anticipate holding a combined stake of about 42% in Gores Holdings upon completion of the deal.

Gores wasted no time in trying to hype the iconic Hostess. The company said it expects Hostess will have an initial enterprise value of about $2.3 billion, or 10.4 times its forecast 2016 adjusted operating profit of about $220 million. That type of valuation deserves serious scrutiny by investors during roadshow presentations for two reasons.

First, Hostess has a track record of financial malaise as the nation has moved to healthier snacking and has been exposed to higher operating costs and excessive debt. In 2004, in the face of rising labor costs and fluctuating prices of flour and other ingredients, the company filed for Chapter 11 bankruptcy protection.

Then, in 2012, the company again filed for Chapter 11 as it struggled under the weight of $860 million in debt and bloated labor force costs. Gores using adjusted operating profit to base its valuation of Hostess suggests the company's bottom line remains under pressure due to a heavy debt load despite likely seeing relief from laying off thousands of workers during its latest bankruptcy.

Second, Hostess doesn't appear to have reinvented itself under current owners Apollo and Metropoulos. A casual glance at its website shows the company is still reliant on sugary delights such as Twinkies, Ho-Hos and chocolate cupcakes. With major retailers including Walmart (WMT) - Get Report and Kroger (KR) - Get Report devoting more shelf space to healthier snacks, it's hard to see how Hostess will remain relevant to increasingly waist-watching consumers.

The ingredients used by Gores to bake up the valuation on Hostess may have to be tweaked.

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