Behind the financial maneuvering at Hostess

Stephen A. 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, companies that revolutionized the way society communicates.

The 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 operational and financial 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 work force and the broader economy is still a matter of debate. Hostess, which has bounced between multiple private equity owners over the last 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 for good.

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 Hostess’s snack cake business during 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 they reopened in Illinois, costing 415 jobs.

The collapse and revival of Hostess illustrates how even in a business success, many workers don’t share in the gains. The episode also provides a snapshot of the economic forces that helped propel Donald J. Trump to the White House.

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,” Mr. Popovich said he supported Mr. Trump, the first time he ever voted Republican.

“It’s getting old, getting bounced around all the time,” said Mr. Popovich, a 58-year-old Ohio resident.

Such frustrations stem from broader shifts in the economy, as all types of companies turn to automation to cut costs and labor unions lose their influence. While these changes have helped keep companies profitable, private equity has used these shifts in the workplace to supercharge wealth far beyond that of the typical chief executive.

And yet, Mr. Trump did not focus on private equity on the campaign trail, instead blaming the plight of the American working class on a shadowy cabal of elitist Democrats and Wall Street bankers who support trade deals that ship jobs overseas.

“People understand jobs going to China,” said Michael Hillard, an economics professor at the University of Southern Maine. “But no one has ever heard of these private equity firms that come in and do all this financial engineering. It is much more complicated and less visible.”

The industry’s trade group, the American Investment Council, says it is sensitive to these issues as private equity’s role in the economy expands. The industry now controls huge swaths of the American work force: 4.4 million employees at over 7,500 companies, according to PitchBook, a private financial data platform. By some measures, Blackstone is one of the nation’s 10 largest employers and one of its biggest landlords. The firm’s co-founder, Mr. Schwarzman, is advising Mr. Trump on job creation.

“At a time when many Americans are concerned about the country’s economic viability, private equity has proven itself in communities throughout the United States as an effective solution,” said James Maloney, the American Investment Council’s spokesman. “Sustainable growth strategies, adherence to responsible investments and a long-view approach are all a part of the present-day private equity model.”

The Times investigation of the Hostess deal shows that today’s private equity also uses another set of tactics, like 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, The Times investigation found, struck a deal to collect as much as $400 million over the next 15 years, based on what Hostess’s 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 when they fail, the firms probably lose out.

And this is not a simple story of powerful investors enriching themselves while some workers struggle. Teachers and firefighters also benefit from private equity.

Pension funds that pay retirement benefits to public servants now depend on private equity to generate huge returns. Without it, taxpayers could bear more of the costs.

“Hostess’s comeback was a win-win-win-win,” an Apollo spokesman said in a statement, adding that its investment benefited workers, communities, investors and consumers. “After teaming up to take on the daunting financial and operational challenge of creating a new company around the Hostess brand, Apollo and Metropoulos & Co. completed a highly successful private equity investment.”

On a more basic level, Americans enjoy what private equity has owned: GNC vitamins, affordable jewelry at Zales, and birthday parties at Chuck E. Cheese’s.

Hostess’s new owners rode a wave of nostalgia for the company’s snack cakes, a euphoria that even spread to a sprawling Long Island estate. At a wedding there in 2013, packaged cupcakes were offered to guests.

It may seem an unusual choice, but this party had a special affinity for the snack cake. The bride’s father is an executive at Apollo.

The ‘Secret Sauce’

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 Mr. Black traveled to Lubbock, Tex., to speak to a group of retired teachers, he emphasized a humbler side of his pedigree.

“You should know,” Mr. 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.”

Mr. 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 Mr. Black a very rich man.

Mr. Black, or an affiliated limited liability company, owns homes in Beverly Hills, Miami Beach and several locations in New York, an analysis of real estate records shows. This year, he bought the $38 million house in Beverly Hills that had belonged to the actor Tom Cruise.

Private equity’s relationship with pension funds is mutually beneficial. As countless baby boomers reach retirement at a time of historically low interest rates, public pension funds need to achieve returns that match their liabilities — and private equity has delivered.

Nearly half of private equity’s invested assets now 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.

The Teacher Retirement System of Texas has invested in the fund that bought Hostess. And that fund has reaped 27 percent net during the three years it owned Hostess, significantly more than the stock market returned in that period.

“You need to get people in whom you trust and who will keep up our fund,” said Fran Plemmons, a former president of the Texas Retired Teachers Association who was a teacher and principal for 25 years. “If they do that, you need to get out of the way.”

Ms. Plemmons said her $31,200 yearly pension allows her to live modestly but comfortably. High returns from private equity investments, she said, help keep pension payments flowing to retired school workers across Texas, which trickles down into the local economy.

For the teachers in Lubbock, Mr. 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.”

Hostess fit that formula.

Not only were Americans turning to healthier snacks and eating less junk food, but Hostess had its own challenges.

In 2012, the baking company had gone through a bruising bankruptcy, its second in a decade. The company laid off most of its 18,500 unionized drivers, loaders and bakers, not long after the bakers’ union voted for a companywide strike rather than accept another round of concessions.

But what was disaster for previous owners looked like treasure to Apollo and Metropoulos.

When Hostess lenders auctioned off the company in early 2013, Apollo and Metropoulos bought some of Hostess’s snack cake brands, which included Twinkies and Ding Dongs.

Snack cakes still produced some of the highest profit margins in the food industry and Hostess cakes were particularly well-known. The bankruptcy also provided Apollo and Metropoulos a clean slate, liberating them from union contracts, labor rules and debt and pension payments.

One group of workers who had no place at the new Hostess: the unionized drivers, who transported snack cakes and bread to grocery stores nationwide.

Now, Hostess would send its baked goods to warehouses, where retailers like Walmart would ship to individual stores.

Ronald Litland, 44, delivered Hostess products in Illinois for 10 years. After he was laid off in 2012, he enrolled in a for-profit college in hopes of finding a new career in information technology. When his unemployment benefits ran out, he delivered pizzas. He never finished school, but is still paying back student loans and taking care of his son.

“I have a hard time making ends meet,” said Mr. Litland, who earns about $24,000 a year.

Like the drivers, Hostess’s baking operation was also cut back. Apollo and Metropoulos chose to buy only a handful of its roughly one dozen snack cake bakeries.

Other parts of the former Hostess baking empire were scaled back as well. Food companies picked off some of Hostess’s bread brands, but reopened only a small fraction of the bakeries.

Before being laid off from Hostess, Mr. 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 Mr. Popovich, whose most recent job driving a forklift at a solar panel plant paid about $16 an hour.

Mr. 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 his home in Toledo, Ohio, 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 Mr. Popovich when he was laid off. Those liabilities were wiped out in the bankruptcy.

New Shoes and Dashed Hopes

At a brick bakery in Schiller Park, Ill., Twinkies started rolling off the line nearly a century ago. And when Apollo and Metropoulos bought some of Hostess’s cake plants and brands out of bankruptcy in 2013, Schiller Park’s plant was one of the fortunate few to reopen.

“Schiller Park, We ♥ You,” read a billboard that Hostess sponsored in the town, the heart carved into the image of a half-eaten Twinkie.

The celebration was short-lived. Just over a year after the plant’s grand reopening, Hostess shut it down.

The fallout was swift. 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 this tiny working-class suburb of Chicago. The plant itself, an institution so old that it predated nearby O’Hare International Airport, was suddenly vacant.

“We got our hopes up again,” said the town’s mayor, Barbara J. Piltaver. “And then all of a sudden, we had a big hit.”

The story behind the rise and fall — and fall again — of the Schiller Park plant encapsulates private equity’s relationship with workers and labor unions.

It’s a complicated issue. 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 analysisof 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. And she was relieved to return, after several months of unemployment, to be part of what many workers believed was the company’s long-term comeback.

Schiller Park was a starting point for getting Twinkies back on the shelves by summer 2013. As part of that push, many Schiller Park employees worked 12-hour shifts, six days a week, and could volunteer for a seventh day.

“We were all proud of what we accomplished,” said Michael Spina, who worked for Hostess for many years in St. Louis and then moved to Schiller Park to help manage production when the plant reopened.

What the workers were never told, however, 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. She added that the setup of the bakery — its low ceilings and lack of a loading dock — was not conducive to the company’s future plans. The company says it could not tell workers of its plans because of labor rules.

The expendability of Schiller Park reflects Apollo and Metropoulos’s 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.

In 2012, Hostess had about 8,000 employees and eight bakeries dedicated exclusively to snack cakes. Six other plants produced at least some desserts. Today, the new Hostess has only three plants and 1,200 workers.

At Schiller Park, some workers earned a dollar 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.

Former employees recalled grueling shifts when temperatures inside the plant neared 110 degrees. The workers were given Gatorade to rehydrate.