Buyout Firms Could Scoop Up Cupcake Crumbs

NEW YORK (The Deal) -- That's the way the cookie crumbles. Or, in this case, the cupcake.

Crumbs Bake Shop (CRMB), the New York maker of delectable frosted treats, is ceasing operations and looking at a bankruptcy filing, according to reports that emerged late Monday, July 7.

Next, sources say, private equity firms may look to bid on the company's assets. So far in 2014, LBO shops have sought deals with consumer brands and restaurants, pushing up sector multiples.

Industry watchers said private equity shops have long been reluctant to consider Crumbs as an LBO target, in part because until recently it operated more than 60 stores in about a dozen states; when the Wall Street Journal reported news that it would close its doors, that number had fallen to 48 locations.

Crumbs' rise and fall was quick; it went public valued at around $13 a share in 2011 via a merger with a special purpose acquisition company and grew at its peak to 70 locations. However, as Americans' infatuation with fattening cupcakes began to subside, so did Crumbs' performance, and its stock plummeted soon after its debut.

The stock was suspended from the Nasdaq on July 1, after Crumbs failed to meet minimum market listing requirements. That, in turn, triggered a default on Crumbs' debt.

In January 2014, the company said it completed a $5 million senior secured credit facility with Oklahoma-based Fischer Enterprises LLC; Fischer bought another big dessert fad in 2012, Dippin' Dots Inc., after its bankruptcy.

On top of its loan with Fischer Enterprises, Crumbs also has $10 million in senior convertible notes due 2018.

The company posted a loss of $18.2 million last year, and its cash on hand fell to $893,000, from $6.3 million in 2012.

A pair of financial sponsors backed by billions in new capital could rejuvenate the brand. Connecticut-based Catterton Partners and Georgia-based Roark Capital Group have made numerous investments in consumer food brands and are said to be looking at potential investment opportunities.

Roark closed its third fund, a $1.5 billion vehicle, in 2012; the following year, Catterton wrapped up $2.1 billion in fundraisings.

Catterton and Roark did not respond to requests for comment.

Crumbs said in a recent quarterly filing that it is ramping up licensing initiatives, something that sources said is likely to continue once it sees its ownership transitioned to its next backer.

While it is unlikely Crumbs' stores will be salvaged in the event of a liquidation, several buyout pros agreed that the company's brand power could extend to supermarket shelves, where it could compete with another recently bankrupt baker that fell into sponsor hands: Hostess Brands Inc.

Hostess saw its dessert and bread businesses divvied between Apollo Global Management LLC and Metropoulos & Co. (cupcakes & cookies) and Flowers Foods Inc. (breads).

One source suggested that Hostess could possibly bid for Crumbs' assets, and noted that new operator Metropoulos has been eager to integrate healthier offerings into the dessert maker's stable.

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