The Stalking Horse and the Triumphant Return of the Ding Dong!

NYT:  Hostess Sells Twinkies Brand to Investment Firms
"Twinkies and Ding Dongs are back from the dead...Hostess Brands, the now bankrupt owner of the cream-filled confections, agreed on Tuesday to sell the snacks — along with Ho Hos, Sno Balls and Dolly Madison Zingers — to two investment firms with a shared history of corporate turnarounds...The deal, worth USD 410 million...The new owners will be Apollo Global Management and Metropoulos & Company, which owns Pabst Blue Ribbon and Vlasic pickles...Apollo and Metropoulos emerged from what at one point seemed like a crowded field of bankruptcy bidders for the brands. At one point, more than 100 parties had expressed interest in Twinkies...But by 5 p.m. Monday, the deadline for bids, the only qualified offer came from Apollo and Metropoulos. Advisers to Hostess canceled an auction scheduled for Wednesday morning and declared the two the winner.  “It’s not that we lacked interest,” Gregory F. Rayburn, the Hostess chief executive, said in an interview. “Other bidders felt that they could not top the price.”...Hostess is still selling its other remaining brands, including Drake’s snack cakes. Those auctions are expected to conclude by early next month."

How exactly did this auction work?

CNBC:  'Wild and Woolly' Twinkies Auction Expected: Hostess CEO     Jan 31, 2013
"The bids for Twinkies and the other snack cakes of bankrupt Hostess Brands will be intensely competitive, company CEO Greg Rayburn predicted in a "First on CNBC" interview on Thursday.  Hostess has chosen a baseline offer of USD 410 million from private-equity firms Apollo Global Management and Metropoulos & Co. to purchase the brands, five bakeries and certain equipment...The so-called "stalking horse" bid by the private equity firms to buy the 82-year-old baker would serve as the minimum offer...Others bidders could still offer more at an auction that Hostess plans to hold next month — pending authorization from the U.S. Bankruptcy Court for the Southern District of New York. "

so the "stalking horse" Apollo made their bid known and then there was a court run auction to see if any other parties could top that bid?   However in the end no one wanted to top USD 410 MM.   Why do you want to conduct an auction in this manner?

Here is a description of some standard types of auction mechanisms

There are two potential obstacles to using standard auction mechanisms in bankruptcy proceedings (1) there may be a substantial fixed cost for a bidder to value the assets.  Hence a bidder will decrement his valuation by the cost of gathering the information.  Furthermore a potential bidder may choose not to participate at all if the cost of gathering the information is significant and the probability of winning the auction is low.  (2) there may be great uncertainty as to what the assets are worth.  If one conducted a sealed first price auction then bidders would have no opportunity to confirm their valuations from the valuations of other bidders.  Since the risk would be higher bidders would decrement their bids.  If one conducted an English first price auction then there would be an opportunity to see how others value the asset - on the other hand the first bidder is still at risk of going out on a limb and having no one else bid.  The stalking horse mechanism guarantees at least one party will bid on the asset and also sets a public reference price for the asset.

so why would anyone want to go out on a limb and be the first public bidder ie the stalking horse


from here is a description of an auction with a stalking horse

""Incentives for the stalking horse - Potential purchasers may be reluctant to take on the role of the stalking horse for a variety of reasons, preferring instead to wait for another bidder to negotiate the deal and then participate in the auction. The initial bidder typically has to expend greater resources than other bidders in negotiating the deal, performing due diligence, and otherwise setting the "floor" for the terms of the transaction. To compensate the stalking horse for its time and effort, certain incentives are typically negotiated. Without receiving these incentives, the potential purchaser would not otherwise agree to be the stalking horse. These incentives may include expense reimbursements, break-up fees, favorable bidding procedures, and exclusivity arrangements. The incentives requested by the stalking horse are often at odds with the debtor's duty to obtain the highest and best value and the requirements of the bankruptcy code. The negotiations between the debtor and stalking horse must strike an acceptable balance, or the bankruptcy court will likely not approve the stalking horse's proposed terms."

Who knew that Twinkies and Ding Dongs could be so educational?