Hostess Brands Tax Receivable Agreement Explained
The Hostess Brands Tax Receivable Agreement (TRA) has been a notable topic of conversation within the financial industry. Essentially, the TRA is an agreement between Hostess Brands and its pre-IPO owners regarding the tax implications of the company going public. In this article, we`ll dive into the details of the TRA, why it matters, and its impact on the Hostess Brands IPO.
What is a Tax Receivable Agreement?
A tax receivable agreement is a contract between a company and its existing shareholders. It outlines the tax implications of the company going public and how any tax benefits or liabilities will be distributed between the parties. Essentially, it`s a way to allocate tax liability between the company and its shareholders in a fair and transparent way.
The Hostess Brands TRA
In 2016, Hostess Brands went public through a reverse merger with Gores Holdings, Inc., a special purpose acquisition company (SPAC). Prior to the merger, Hostess Brands was owned by private equity firm Apollo Global Management. As part of the reverse merger, Hostess Brands and Apollo Global Management entered into a TRA.
Under the terms of the TRA, Apollo Global Management is entitled to receive a portion of the future tax benefits that Hostess Brands may receive as a result of certain transactions. For example, if Hostess Brands were to recognize a tax benefit due to the utilization of net operating losses (NOLs), Apollo Global Management would receive a payment equal to a percentage of that benefit.
Why Does the TRA Matter?
The TRA is important because it has a significant impact on Hostess Brands` financials and, as a result, its valuation. When Hostess Brands went public, the TRA created a liability on its balance sheet, which reduces its net worth. This liability also reduces Hostess Brands` taxable income, which can result in significant tax savings for the company. However, these savings are offset by the payments that Hostess Brands must make to Apollo Global Management under the TRA.
Additionally, the TRA can impact the price of Hostess Brands` stock. Shareholders may hesitate to invest in a company that has a large tax liability on its balance sheet, which can lead to a lower valuation for the company. On the other hand, the TRA could potentially increase the value of Apollo Global Management`s shares in Hostess Brands, as they are entitled to a portion of the company`s tax benefits.
Impact on the Hostess Brands IPO
The TRA had a significant impact on the Hostess Brands IPO. As mentioned, the TRA created a liability on the company`s balance sheet, which reduced its net worth and could potentially lower its valuation. However, Hostess Brands` management team was able to address these concerns by disclosing the TRA in its SEC filings and explaining how it would impact the company`s financials.
Ultimately, the IPO was a success, and Hostess Brands` stock has performed well since going public. However, the TRA remains an important consideration for potential investors and analysts when evaluating the company`s financials.
The Hostess Brands Tax Receivable Agreement is an important agreement that outlines the tax implications of the company going public. While the TRA can create a liability on the company`s balance sheet and potentially impact its valuation, it is also a way to allocate tax benefits and liabilities between the company and its shareholders. As Hostess Brands continues to grow and evolve, the TRA will remain an important consideration for investors and analysts as they evaluate the company`s financials.