After 2012 bankruptcy, a sweet comeback for Hostess

How much is a snack-cake maker worth? If it's Hostess Brands, which nearly went out of business just four years ago, that would be about $2.3 billion, according to the terms of a takeover deal announced on Tuesday. And it seems the maker of Twinkies, Ho-Hos and Ding Dongs is in far better financial shape ahead of its coming initial public offering than many investors might assume.

Under the deal with Gores Holdings (GRSH), the special-purposed acquisition company established by private equity firm Gores Group will invest $375 million in cash it raised from an IPO in August 2015. Once the deal closes, now set for later this year, Gores Holdings' name will change to Hostess Brands, and its stock will trade under a new ticker symbol.

Gores Group CEO Alec Gores and other Gores affiliates, along with Hostess owner C. Dean Metropoulos, will invest an additional $350 million in the deal. Once the transaction is completed, private equity giant Apollo Global Management (APO) and Metropoulos and his family will hold approximately 42 percent of Gores Holdings. Metropoulos will remain Hostess' executive chairman and William Toler will continue as chief executive.

"Hostess presents a unique opportunity to invest in an iconic brand with strong fundamentals that is poised for continued growth," said Alec Gores in a press release. "We look forward to working with the team at Hostess as we collaborate to further capitalize on these attractive growth prospects."

In 2013, Metropoulos, whose fortune Forbes estimates at $2.4 billion, agreed to acquire Hostess Brands in conjunction with Apollo Group for $410 million. At the time, many classic Hostess products such as Twinkies were so scarce that fans took to hoarding them. The spongy creamed-filled cake made its return that year. Another classic Hostess snack treat, Suzy-Qs, are also coming back.

Despite being much smaller than it used to be, Hostess Brands' financial condition has improved. According to a presentation the company made on Tuesday to investors, payroll has shrunk from about 8,000 mostly union jobs to 1,170 now. It has slashed the number of bakeries from 11 to three, although it invested $130 million to improve its manufacturing capabilities.

Hostess now offers 90 products compared with 150 previously. However, it has added new twists on old favorites, such as chocolate Twinkies. Hostess recently entered the in-store baked goods market through its acquisition of Superior Cake Products, and it has high hopes for the future.

According to the company presentation, revenue and net income are forecast to climb over the next few years. It expects sales in 2017 to hit $781 million versus $582 million in 2014. Net income is expected to climb as well, from $81.5 million in 2014 to $101.8 million in 2017.

Hostess, however, remains a small player in the stagnant baked goods market. According to Euromonitor, category volume rose 1 percent in 2015 while dollar sales gained 2 percent. Bimbo Bakeries USA, which is a unit of Mexico's Grupo Bimbo, leads the market with 7 percent share and $3.9 billion in sales. Flowers Foods (FLO) ranked second with 4 percent share and $2 billion in sales.

Hostess will have to sell a lot of Twinkies and Ding Dongs before it can overtake those leaders.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.