Stephen Lubben at DealBook noticed something kind of amazing in the Hostess Brands bankruptcy case:
Turns out that Hostess has no treasury department. Indeed, it apparently doesn’t have anyone who can perform treasury functions at all.
The company has asked the bankruptcy court for permission to hire FTI Consulting to do the work. Apparently Hostess does not have much of a finance department either, since FTI is also providing employees for that department.
If approved, FTI will provide three people to staff Hostess’ treasury department. The interim treasurer gets monthly fees that work out to an annual salary of $780,000. His two deputies get $660,000 per year, each.
The finance department group gets paid hourly rates that top out at $895 per hour. You might think that would supplant the need for a financial adviser in the case, but Hostess is asking to retain one of those, too.
Now that maybe goes a little overboard on the grave-dancing (lots of, really all, companies with full honest-to-goodness treasury and finance staffs still hire advisers in bankruptcy) but, still: that is kind of weird! If you read Hostess’s motion and the attached engagement letter, it appears that they’re just seeking signoff on an arrangement they struck in June. So they’ve been operating for at least six months or so with an outside consultant as their contract treasurer – and with the rest of their treasury roles filled either by other consultants or by nobody. That’s somewhat unusual for a company with 19,000 employees, a pension plan, and something like $1bn in enterprise value.*
I don’t really know what’s going on here but just for fun let’s blame private equity! In this connection, it’s worth noting that Hostess has been down this road before and was acquired out of bankruptcy in 2009 by Ripplewood Holdings. Private equity firms are, of course, rapacious scum put on earth solely to destroy the jobs of innocent hard-working Americans, so sayeth Newt, and if you like you can put that interpretation on Ripplewood here, or not, whatever. That will be determined by a series of campaign ads and op-eds, though it’s worth noting that Ripplewood had the decency to pluck Hostess out of Chapter 11 and keep it alive for over two years before re-bankrupting it.
But I think this oddity illustrates another aspect of private equity firms, which is that their deals-’n'-finance operations tend to be comically lean and intensively supported by outside advisers. This can sometimes make them very unpleasant to work with as a service provider: whereas working with public companies involves legions of finance staff, in-house lawyers, etc. with long careers at the company who do a whole lot of the necessary work (diligence, preparing presentations, etc.) for a merger or a financing, working with private equity often involves some 26-year-old who’s put in charge of babysitting the bankers and lawyers and pretty much outsources everything to them. There is no bitterness in this description what. so. ever. And when neither the PE firm nor its bankers and lawyers have expertise in something, they tend to have the budget and mindset to go and find the leading expert in the field to consult. When I worked with private equity firms I occasionally found myself on very, very expensive conference calls.
That actually always struck me as a pretty good model for deal-making: you have a lean, fully committed, highly paid internal team supplemented by highly motivated financial and legal advisers and by the best consultants money can rent by the hour. It’s a very very top-line focused approach, which has to be the right way to do an LBO: if you get a big acquisition right, the returns will dwarf a few $10,000 checks for half-hour conversations with consultants, so those consultants will look like a bargain if they get you comfortable with the deal. (And if they get you to pass on a bad deal, even better.) It’s arguably a good way to get a financing done: the private equity staff are repeat players in the financing markets and will be better at most aspects of their deals than the average small-to-midcap corporate staff. Hostess raised little slugs of money over the last year from Ripplewood and other funds, and my guess is that Ripplewood was more instrumental in getting those deals done than the treasurer they bused in from FTI.
But it’s a weird way to actually run a company’s day-to-day treasury operations, and not really in keeping with the traditional view of private equity as being relentlessly bottom-line focused in operations. Lubben suggests that they consider hiring a treasury staff via Craigslist and, yeah, kind of, right? It seems unlikely that Hostess was driven into bankruptcy either by financial inattentiveness or by exorbitant bills for its treasury department, but this story sure suggests some combination of inattentiveness and profligacy. And in an environment that’s suddenly gotten all hostile for private equity, seeking to cut benefits for your manufacturing workers while looking inattentive and profligate with your financial staff doesn’t seem like the best PR move.
* Strictly speaking $981mm in assets, supposedly; getting at the enterprise value from the right side of the balance sheet is rather nebulous but includes in any case well north of a billion in debt at face.