Why Twinkie-maker Hostess could make for a sweet acquisition

Brian Sozzi
·Executive Editor
Updated ·3 min read
150

In two sentences to Yahoo Finance Live earlier this year, Hostess Brands CEO Andy Callahan summed up why the turned-around Twinkie-maker is attracting buyout interest from packaged-food titans.

"Consumers' ubiquity of love for baked goods is universal. Their love of snacks is universal," Callahan said.

Reuters reported on Friday that PepsiCo (PEP), Mondelez (MDLZ), General Mills (GIS), and Hershey (HSY) have expressed interest in Hostess Brands.

Mondelez could be the name to watch — under CEO Dirk Van de Put, the company has made several big acquisitions, notably spending $2.9 billion to buy Clif Bar. Van de Put told Yahoo Finance Live earlier this year he is on the hunt for more snack deals with his robust, cash-rich balance sheet.

A deal for Hostess likely isn't imminent, but the company has reportedly retained Morgan Stanley to run point on the process.

Shares of Hostess Brands surged 22% on Friday's session. The stock has tacked on another 2% in early trading on Monday.

"We do not to comment on rumors or speculation," a spokesperson for Hostess told Yahoo Finance via email.

The addition of Hostess to any of those larger food brands makes strategic sense, pros say.

"We see potential for sustainable, profitable growth in the sweet baked goods," wrote Evercore ISI analyst David Palmer in a client note today.

To that end, Hostess has delivered 11% organic sales growth since 2018 despite the food industry playing up healthier snacking options in the zero-sugar category.

Palmer added that Hostess could provide an acquirer a national footprint in the sweet treats category with an enviable 14% market share. Cost synergies also exist, as do "significant" revenue synergies, as a larger entity could unleash cross-selling opportunities.

And lastly, Palmer thinks Hostess has become a much better operator since Callahan took over in May 2018.

The company has bolstered its marketing, acquired cookie maker Voortman's, and boosted innovations with products such as Bouncers and Kazbars.

"Today, we believe Hostess is capable of sustainable long-term sales growth of 3%+ and operating profit growth of +5-7%," Palmer said.

The analyst estimates that fair value for Hostess in any deal would be $34 a share, about 24% above current trading levels.

Hostess Twinkies and CupCakes are displayed on a store shelf on May 17, 2021 in San Anselmo, California.
Hostess Twinkies and CupCakes on a store shelf on May 17, 2021, in San Anselmo, Calif. Hostess Brands posted better-than-expected first quarter earnings with revenues of $265.42 million compared to $243.49 million one year ago. (Justin Sullivan/Getty Images)

Though the pandemic fueled a boom in Hostess' business, the numbers support that Callahan has driven big-time results and set up the business for a buyout.

Analysts estimate Hostess will haul in $1.4 billion in sales this year, up from $907 million in 2019. Adjusted earnings are seen at $1.12, up from $0.19 in 2019. Operating profit margins have improved 100 basis points from 2019 to the estimated 2023 level.

Since Callahan assumed the CEO role on May 7, 2018, shares of Hostess Brands have gained 77%. The S&P 500 (^GSPC) is up 63%.

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.

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