The purpose of this diary is to explore the economic and financial background of those pillaging and burning a (formerly) great American brand. Hostess Bakery created several American comfort foods including Ding Dongs, Ho Hos, Wonderbread, Suzy Qs, Dolly Madison Zingers, and Drake's Ring Dings. The fact that Hostess Bakery was the 2012 version of 2008's General Motors and Ford Motor Company is beside the point of this diary. However, let me note that Ding Dongs, Ho Hos, etc. do not mesh well with diet-conscious cuisine. Since moving to California ten years ago, I am not sure I have had more than two or three doughnuts during this period. Carbs and sugar and calories, oh, my!
Nevertheless, Hostess is now a great American tragedy, in no small part related to venture capitalists and corporate raider. This diary is the story of what has become normal in American business history and unfettered capitalism since 1865 and the end of the American Civil War. The robber barons came to the fore and such American luminaries as Cornelius Vanderbilt, John D. Rockefeller, and others earned their fortunes at the misfortune of others. Sometimes, this misfortune was facilitated by the very people who later benefited from the 'distressed events.'
More recently, Michael Milken, Carl Icahn, Monarch Alternative Capital LP, and Silver Point Capital LP have taken up the mantle of the robber baron. The venture capitalists see opportunity in the recession and swoop in to take advantage.
For an interesting filmaic history of the robber barons, the History Channel now has some fantastic historical background on the rise of the robber barons in 'The Men Who Shaped America.' Modern day robber barons and their admirers provide commentary (think Donald Trump, GE's former-CEO Jack Welch, Time-Warner's former-CEO Richard Dean Parsons, CNBC Mad Money's Jim Kramer, etc.).
According to the History Channel, Vanderbilt reportedly attempted to sell railroad rights of way into New York City to various railroads only to be rebuffed. 'Sell' in this case might be synonymous with 'extort.' When the railroads refused to open their purses to Vanderbilt, he blocked them from crossing the Albany Bridge towards New York City, causing a financial panic. Seeing opportunity in the misfortune of others that directly resulted from his own actions, Vanderbilt purchased as many shares of the New York Central on the New York Stock Exchange as he could at firesale pricing. Vanderbilt parlayed his investment into the control of the New York Centeral and into purchase of other railroads in similar fashion.
To further his transportation empire, Vanderbilt financed the early kerosine industry based in Eastern Ohio and Western Pennsylvania. The direct beneficiary of Vanderbilt's efforts to fill his freight trains was an upstart oilman by the name of John D. Rockefeller. Eventually, Rockefeller bankrupted hundreds of refinery owners as he solidified his hold on the kerosine and oil industry. When Tom Scott, head of the Pennsylvania Railroad attempted to build his own oil pipeline to compete with Rockefeller, Rockefeller closed his Pittsburgh refineries, costing Scott fifty percent of his freight revenue. Rockefeller's actions lead Scott's laying off thousands of workers and decreasing the wages of the remaining workers. The rioting that ensued nearly destroyed the Pennsylvania Railroad (full disclosure, at least three generations in my family worked for the PRR).
Needless to say, today's vulture capitalists, including Monarch Alternative Capital and Silver Point Capital, are merely a stone's throw morally away from Vanderbilt, Rockefeller, Carnegie et al. Today, when you discuss the new robber barons, famous American company names like Blockbuster, the Texas Rangers, the Dallas Stars, Muzak, and Hostess Bakery enter the conversation. More on the baining of Hostess Bakery below the fold.
Another diary by bluebarnstormer has an informative inside perspective from a Hostess Bakery union employee based on three generations of experience at Hostess Bakery and its antecedents.
When you think about Hostess Bakery, you need to explore the financial underpinnings of the company. Apparently, the Monarch Alternative Capital LP and Silver Point Hedge Funds are the primary culprits. The machinizations of Monach and Silver would make Vanderbilt and Rockefeller proud. These two hedge funds are known as distressed debt investors, purchasing the debt of troubled companies at steep discount http://www.businessinsider.com/....
When Hostess Brands announced that it would close up its operations,the forces most responsible for that decision were two hedge funds that control hundreds of millions of Hostess debt and which have finally decided they won't squeeze any more filling into the Twinkie.Of course, like diarist bluebarnstormer points out, Monarch and Silver Point could not be trusted to work in the best interests of the union members, their families and their pension funds. The hedge fund managers' only interest lies in pulling as much capital out of Hostess Bakery and putting in as little as possible. Profitability is not the issue. They pillaged as much of the pension funds as possible and now walk away, leaving thousands of employees and their families shattered.
The funds, Silver Point and Monarch, are what are known as distressed debt investors. They buy the debt of troubled companies—usually at steep discounts. Some consider them white knights who are willing to take make risky investments in companies on the verge of failure. Others say they are “vulture funds.”
Only Silver Point and Monarch could have kept Hostess out of liquidation and kept the Twinkie bakery ovens firing. But they were, ultimately, unable to reach a deal with the unions that represents the workers who make and deliver products like Twinkies, Wonderbread and Ding Dongs. Without large union concessions—what some would say, total union capitulation—the hedge funds decided Hostess would have to die.
Interesting of course that this all came to fruition the week following the election rather than during the week prior. Just wondering what would have happened had Monarch and Silver Point done the deed in October 2012.
Now to the Monarch and Silver Point Hedge Funds and their principles. Bloomberg's BusinessWeek has profiles on each of these Vanderbilt and Rockefeller personifications.
Here is the link and related company background for Monarch Alternative Capital LP http://investing.businessweek.com/....
Monarch Alternative Capital LP is a privately owned hedge fund sponsor. The firm invests in the public equity and fixed income markets across the globe. It primarily invests in debt of bankrupt and distresses companies. The firm also invests in equities received in connection with the conversion of such debt into equity. It employs a fundamental analysis to make its investments. The firm conducts in-house research to make its investments. It was formerly known as Quadrangle Debt Recovery Advisors. Monarch Alternative Capital is based in New York, New YorkMonarch has approximately $5.0 billion in assests under portolio management and is based in New York with an office in Israel http://www.monarchlp.com/. Monarch's corporate website self-describes its approach as research-oriented and 'event-driven.' Research-oriented suggests a proactive approach and vision. Event-driven suggests a more reactive approach. Kind of like sharks in the water.
The corporate officers include Andrew J. Herenstein, Managing Principal and Co-Portfolio Manager, Josiah M. Rotenberg, Managing Principal and Senior Research Analyst, Christopher Santana, Managing Principal, Michael Andrew Weinstock, Managing Principal and Co-Portfolio Manager, and Michael Maroof, Chief Financial Officer.
In 2010, Monarch became involved in the messy bankruptcy of Your Texas Rangers baseball team and the Dallas Stars hockey team when it purchased the debt of Hicks Sports Group LLC. Monarch then threatened the 'involuntary bankruptcy' of its Texas Rangers holdings if Commissioner Bud Selig did not play by Monarch's rules and attempted to seize the team for sale to an acceptable bidder http://blogs.dallasobserver.com/....
Still no word from Major League Baseball concerning its imminent seizure of Your Texas Rangers in order to expedite the sale to Chuck Greenberg and Nolan Ryan's Rangers Baseball Express. But, finally, there's been direct contact with Monarch Alternative Capital, the main lender holding up the deal with Hicks Sports Group: The New York Times has gotten hold of an e-mail Monarch's managing principal, Andrew Herenstein, sent to MLB owners gathered in New York City this week for owners' meetings.In February 2011, Monarch was connected to Carl Icahn in an attempt to purchase Blockbuster for $300 million following the latter's bankruptcy filing. Did I mention that Monarch and Icahn were Blockbuster creditors who helped finance the actual bankruptcy filing, thus having access to the internals? http://www.bloomberg.com/....
He more or less reiterates what Sports Business Journal reported this week and what Bloomberg News noted in mid-April: Should Bud Selig make a move, so too will Monarch -- straight to the federal courthouse, involuntary bankruptcy papers in hand.
It all comes down to the numbers. Tom Hicks last year defaulted on $525 million in loans. Greenberg's offer has long been believed to be between $570 and $575 million. The creditors claim that "additional costs, including unpaid interest," as The Times notes, have pushed Hicks's debt closer to $600 million. The creditors, right now set to get about half of the sale proceeds (unless MLB steps in and nullifies their claims completely), want their money. So too does Hicks, which is why, sources say, he's been hoping to bring Houston's Jim Crane and his higher offer back to the playing field. Greenberg's stuck in the middle and staying quiet, though Monarch says now that "the Greenberg-Ryan group had rejected 'various modifications' in the sale agreement that would increase the proceeds to the lenders," according to Times writer Richard Sandomir.
Long story short: If MLB steps in, Monarch's suing. And it'll get "costly, distracting and messy," writes Herenstein. "It would be a bad result for the Texas Rangers, M.L.B. and the banks." And, don't forget, the fans.
Creditors including billionaire Carl Icahn and Monarch Alternative Capital LP are targeting Blockbuster Inc., the bankrupt movie-rental company, in a possible buyout for less than $300 million, a person familiar with the matter said.Silver Point Capital LP is a privately-owned hedge fund sponsor based in Greenwich, CT http://investing.businessweek.com/.... Interestingly, the corporate website has less than limited information available to the public https://www.silverpointcapital.com/....
Icahn and Monarch are Blockbuster creditors who helped to finance the bankruptcy, making them potential candidates to buy the company, said the person, who declined to be identified because the discussions are private. Icahn and Michael Weinstock, managing principal at New York-based Monarch, didn’t immediately return calls seeking comment after regular business hours yesterday.
Silver Point Capital L.P is a privately owned hedge fund sponsor. The firm manages hedge funds for its clients. It invests in the public equity, fixed income, and hedging markets of the United States. The firm primarily invests in securities of distressed, large-cap, and Mid-cap companies; bank debts; bonds; and trade claims. It specializes in credit analysis and diversified credit-related investments. Silver Point Capital is based in Greenwich, Connecticut.Silver Point's corporate officers include Edward A Mule, Co-founder and Partner, age 50, Robert J. O'Shea, Co-founder and Partner, age 48, David Steinmetz, Chief Financial Officer, Michael A. Gatto, Principal, age 45, John M. Gannon, Principal, and Richard Parisi, Board Director. Mule and O'Shea are alums of our friends at Goldman, Sachs.
Some of Silver Point's 'distressed events' include Kripsy Kreme, Moneygram, Herbst Gaming, Dana Holdings, Torch Energy Royalty Trust, Cooper-Standard Holdings, and FiberMark. Silver Point also has investments in Sage Telecom, Granite Broadcasting and Communications Corporate of America http://www.minyanville.com/....
In April 2011, Silver Point was involved in the attempts of Mood Media Holdings to merge with Muzak, a provider of music, messaging and video for businesses http://www.cgsh.com/....
Cleary Gottlieb is representing Silver Point Capital, a private equity firm, and Muzak Holdings, a premier provider of music, messaging and video for business, in connection with the proposed acquisition of Muzak by Mood Media Corporation, a leading in-store media specialist. Under the terms of the merger agreement, a subsidiary of Mood will merge with and into Muzak, with Muzak unitholders receiving cash and contingent consideration in exchange for their units in Muzak. The transaction values Mood at approximately $345 million on an enterprise basis.
1:21 PM PT: Diarist correction: History Channel program is actually entitled 'The Men Who Built America.'