On Nov. 29, Hostess Brands, maker of Twinkies and Wonder Bread, won final approval from a judge to liquidate the company and sell its assets. Along with the plants and equipment, the assets include the company’s popular brands—many of which have gained iconic status. This has raised a lot of speculation about a buyout, with potential suitors ranging from Flowers Foods (FLO), which makes Nature’s Own bread and Tastykake snacks, to Mexico’s Grupo Bimbo (BIMBOA:MM), maker of Thomas’ English Muffins and Entenmann’s baked goods.
The real question, however, is not who will buy Hostess Brands, but how much they should pay. Hostess has amassed a large portfolio of familiar brands, including Ding Dongs, Ho Hos, Sno Balls, Devil Dogs, and Ring Dings, to name just a few. What value should Hostess (and the potential buyer) put on all these household names? When the 82-year-old company filed for bankruptcy in January, it cited $982 million in assets and debt of $1.43 billion.
The actual amount that changes hands remains to be seen. But whatever the number, it’s likely to represent a great discount on the actual value of these brands. The reason is the tremendous potential contained in these brands that can be unlocked by an experienced manager. Indeed, most brand-valuation models are based largely on forecasting future cash flows based primarily on the brand’s current value. As a result, these methods tend to underestimate potential value by repositioning and extending stale and mismanaged brands.
To accurately evaluate a brand’s potential, one must understand the difference between brand power and brand equity. Brand power is the degree to which a brand can influence consumer behavior; it’s the impact of the brand on shaping customer preferences. In contrast, brand equity is the monetary value of the brand to the company; it reflects the degree to which the brand adds to the company’s bottom line and to the overall valuation of the company. Thus, whereas brand power focuses on consumer preferences and behavior, brand equity reflects the company’s ability to monetize brand power.
In Hostess’s case, there is a huge discrepancy between the power of its brands and the company’s ability to monetize these brands. In this context, the traditional brand-valuation methods are likely to greatly underestimate the value of Hostess. In fact, the potential hidden in Hostess Brands can attract a different kind of buyers—companies specializing in reviving distressed iconic labels, such as Chicago-based River West Brands. These companies build on factors such as the awareness, habit, and nostalgia associated with many familiar trade names. For example, when Procter & Gamble (PG) discontinued White Cloud—the leading two-ply bath tissue brand—Paper Partners trademarked the name and subsequently licensed it to Wal-Mart Stores (WMT). (White Cloud was recently named the top toilet paper in the nation by Consumer Reports).
Shrewd potential buyers can strike a great deal by buying Hostess’s brands. The caveat is that the potential buyer must have the expertise, resources, and patience to unleash the underlying value of these iconic brands.