Ripplewood Holdings

Hostess and the 'Bain-style vultures'

November 19, 2012: 3:59 PM ET

Hostess can blame private equity, but not private equity greed.

FORTUNE -- The fall of Hostess has many fathers. Some were internal, like dunderheaded management and an obstinate baker's union. Some were external, like the unholy marriage of global recession with rising commodities prices.

But here's one thing that Hostess isn't: "A microcosm of what's wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor."

That line came Friday from AFL-CIO president Richard Trumka, who apparently has thrown in his lot with the bakers rather than with The Teamsters (who had agreed to a new contract with Hostess, but got run over anyway). His statement isn't hyperbolic. It's downright dishonest.

The "Bain-style" firm involved here would be Ripplewood Holdings, a New York-based private equity shop run by Tim Collins (who happens to be a prominent Democrat). Ripplewood bought Hostess out of bankruptcy in 2009, investing around $130 million of equity. It would later pump even more equity into the company and also buy some debt, in an (ultimately failed) effort to prevent liquidation.

While still in charge of Hostess, Fortune has learned that Ripplewood never took a dividend. You know, the sort of thing that Bain was (justly) criticized for doing with some of its failed companies. Ripplewood did receive some fee income early on, but nothing that would even come close to offsetting the expected losses. If you want to argue that Collins and company made some lousy decisions -- including on management comp -- I'm not going to quarrel with you. But to assert that Ripplewood or its executives made themselves rich on Hostess is absurd. The reality is that Ripplewood is expected to lose almost its entire investment in Hostess (i.e., over $100 million). If that's getting rich, count me out.

Trumka wasn't available to speak, but an AFL-CIO spokesman named Josh Goldstein tied himself into knots trying to defend his boss's statement. First he suggested that the whole point of Ripplewood's original buyout was to liquidate the company and sell it for parts at a profit. If that was the case, why did Ripplewood bother with two years of losses and demonstrably fight liquidation? He then told me that the company was profitable except for the interest requirements. Given that Hostess lost $341 million in fiscal 2011, Goldstein could only be right if the company was paying more than 34% annually on its debt (the rate is high for market standards, Goldstein's fantasy figure would make loan-sharks blush).

When I mentioned that Ripplewood also was in the red on Hostess, Goldstein told me it was "too early" to determine who had made or lost money on the company. Okay, fine. So how does Trumka know that Wall Street vultures got rich on the deal? If it's too early to count losers, isn't it also too early to count winners?

I get that "Bain" has become a rhetorical boogeyman for folks like Trumka. But his employment of it in this case proves that he never understood what Bain did (and didn't do) in the first place.

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