Behind the financial maneuvering that saved Hostess, an investigation found a blueprint for how private-equity executives have amassed some of the greatest fortunes of the modern era.
Across the nation in summer 2013, there was a feeding frenzy for Twinkies.
The snack cake had returned to shelves just months after Hostess had shuttered its bakeries and laid off thousands of workers. The return was billed on the “Today” show as “the sweetest comeback in the history of ever.”
Nowhere was it sweeter, perhaps, than at the investment firms Apollo Global Management and Metropoulos, which spent $186 million in cash to buy some Hostess bakeries and brands in early 2013.
Less than four years later, they sold the company in a deal that valued Hostess at $2.3 billion. Apollo and Metropoulos have reaped a return totaling 13 times their original cash investment.
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Behind the financial maneuvering at Hostess, an investigation by The New York Times found a blueprint for how private-equity executives like those at Apollo have amassed some of the greatest fortunes of the modern era.
Deals like Hostess have helped make the men running the six largest publicly traded private-equity firms collectively the highest-earning executives of any major U.S. industry, according to a joint study that The New York Times conducted with Equilar, a provider of data on company boards and executives. The study covered thousands of publicly traded companies; privately held corporations do not report such data.
Stephen Schwarzman, a co-founder of Blackstone, took home the largest haul last year: nearly $800 million. He and other private-equity executives receive more annually than the leaders of Facebook and Apple.
Top executives at those six publicly traded private-equity firms earned, on average, $211 million last year — which is about what Leon Black, a founder of Apollo, received. That amount was nearly 10 times what the average bank chief executive earned, though firms like Apollo face less public scrutiny on pay than banks do.
Private-equity firms note that much of their top executives’ wealth stems from owning their own stock, and that they have earned their fortunes bringing companies back to life by applying their expertise. Hostess, a defunct snack brand that was quickly returned to profitability, is a textbook example of the success of this approach.
Yet even as private equity’s ability to generate huge profits is indisputable, the industry’s value to the workforce and the broader economy remains a matter of debate. Hostess, which has bounced between multiple private-equity owners in the past decade, shows how murky the jobs issue can be.
In 2012, the company filed for bankruptcy under the private-equity firm Ripplewood Holdings. Months later, with Ripplewood having lost control and the company’s creditors in charge, Hostess was shut down and its workers sent home.
Without investment from Apollo and Metropoulos, Hostess brands and all those jobs might have vanished forever after the bankruptcy. The way these firms see it, they created a new company and new jobs with higher pay and generous bonuses.
But the new Hostess employs only 1,200 people, a fraction of the roughly 8,000 workers who lost their jobs at Hostessduring the 2012 bankruptcy. And some Hostess employees who got their jobs back lost them again. Under Apollo and Metropoulos, Hostess shut down one of the plants reopened in Illinois, costing 415 jobs.
Since losing his job at Hostess in 2012, Mark Popovich has had three jobs, including one that paid about $10 an hour, half what he made at the Twinkie-maker. A lifelong Democrat and devoted “union man,” Popovich said he supported Trump, the first time he ever voted Republican.
“It’s getting old, getting bounced around all the time,” said Popovich, 58, of Toledo, Ohio.
Before being laid off from Hostess, Popovich made about $20 an hour. Every year, he went on vacation in the Bahamas or St. Martin. His health insurance covered the $385,000 cost when his wife needed major surgery.
“I lived a good life,” said Popovich, whose most recent job driving a forklift at a solar-panel plant paid about $16 an hour.
Popovich is also entitled to a pension, which he was promised after working more than two decades at Hostess. But he recently received a letter at home warning that the pension fund was nearly insolvent.
Apollo and Metropoulos are not obligated to contribute to the pension fund, which is managed by a labor union. Nor do they have to pay the severance that Hostess was obligated to pay Popovich when he was laid off. Those liabilities were wiped out in the bankruptcy.
The investigation of the Hostess deal shows that today’s private equity also uses another set of tactics, such as special dividends and tax arrangements, that maximize profits in creative, yet financially risky, ways.
A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.
The firms also found a way to make money even after the company was sold. The firms struck a deal to collect as much as $400 million over the next 15 years, based on what Hostess’ future tax savings might be.
These winnings do not come without risk to the private-equity firms, which are often taking a gamble on troubled companies. And pension funds that pay retirement benefits to public servants now depend on private equity to generate huge returns.
Leon Black grew up in a family that had a home in Westport, Conn., and an apartment on Park Avenue in Manhattan. He attended Dartmouth and Harvard Business School. But when he traveled to Lubbock, Texas, to speak to a group of retired teachers, he emphasized a humbler side of his pedigree.
“You should know,” Black said, according to a video recording of the February 2012 meeting, “my mother was a teacher, my sister was a teacher, my brother-in-law is a teacher. We have a lot of teachers in our family.”
Black had good reason to flatter the retirees: Pension funds for teachers and other public workers are some of the biggest investors in Apollo’s funds and have helped make Black a very rich man.
Private equity’s relationship with pension funds is mutually beneficial. Nearly half of private equity’s invested assets come from public and private pensions around the world. Private equity uses this pension-fund money to place bets on companies like Hostess, and Texas teachers have shared in the profits from the deal.
For the teachers in Lubbock, Black described the “secret sauce” behind its success: buying the debt of financially troubled companies or purchasing an entire company. The investments, he said, are “value-oriented, if not contrarian.”
At a bakery in Schiller Park, Ill., Twinkies started rolling off the line nearly a century ago. And when Apollo and Metropoulos brought some Hostess cake plants and brands out of bankruptcy in 2013, Schiller Park’s plant was one of the few to reopen.
Just over a year after the plant’s grand reopening, Hostess shut it down. All 415 employees were fired, some for the second time in two years. Schiller Park lost one of its largest employers, creating a ripple effect through the tiny working-class suburb of Chicago.
The story behind the rise and fall — and fall again — of the Schiller Park plant encapsulates private equity’s relationship with workers and unions.
A prominent study of investments across the country concluded that private equity has increased productivity while leading to a minor overall decline in jobs relative to the broader economy. Private equity’s trade group says its own analysis of county demographics found that private-equity investment increases jobs growth in local economies, though the data was limited.
In Schiller Park, Janice Ryan worked at the Hostess plant for about 20 years before the 2012 bankruptcy. She walked to work from her nearby home. She was relieved to return.
What the workers were never told was that Apollo and Metropoulos had no plans to keep Schiller Park in operation over the long term.
“Schiller, in essence, was a contingency plan, opened only to ensure that initial demand could be met,” Hannah Arnold, a Hostess spokeswoman, said in a statement.
The expendability of Schiller Park reflects Apollo and Metropoulos’ plans to run a more efficient operation than their predecessors did. And that model requires far fewer workers than the one that existed for decades.
At Schiller Park, some workers earned $1 less per hour than what workers were paid under the previous owners. Others earned more, the company said. Still, they qualified for bonuses, owed no union dues and received health insurance and dental care. Instead of pensions, they were enrolled in 401(k) plans.
Three workers interviewed said they believed that the final straw for Schiller Park was when they voted to rejoin a union.
Hostess fought the effort. Around the time union officials had planned to start contract negotiations in August 2014, Hostess said it was closing the Schiller Park plant.
Arnold, the Hostess spokeswoman, said the unionization vote did not factor into the decision to close Schiller Park.
For all the profits Apollo and Metropoulos squeezed out of the Hostess factories, a deal hatched in a hotel room on Fifth Avenue in New York shows how private equity can have its snack cake and eat it, too.
There, Apollo and Metropoulos began the process of extracting returns from the company, less than a year after shutting the Schiller Park plant.
First, Apollo and Metropoulos arranged for Hostess to borrow money from the banking giant Credit Suisse. The two firms then pocketed about $900 million of that money for themselves and their investors. Hostess, meanwhile, is stuck repaying the debt.
This type of deal is known as a dividend recapitalization, and it is a staple of private equity’s moneymaking strategy. These deals provide private-equity firms an opportunity to profit before they even sell a company, a bonus to the firms and their investors.
With each dividend recapitalization, more money pours into Apollo, which then flows to the firm’s executives.
A few months after the dividend deal, Apollo and Metropoulos entered into negotiations to sell the company. Instead of being sold outright, Hostess would be acquired by a shell company, created by another private-equity firm, the Gores Group.
Apollo and Metropoulos retained a combined 42 percent stake in the company, which is now publicly traded. After investing only $186 million in cash when they bought the company in 2013 (they took out debt to help finance the rest of the $410 million deal), Apollo and Metropoulos’ investment is now worth 13 times that initial cash investment.
Black’s share of the Hostess profits will be reflected in a series of distributions he collects from Apollo’s publicly traded stock. Last year, his distributions totaled $181 million.