Hilco, Monomoy Find Sweet Turnaround –

In a little more than six months after initially filing for relief under Chapter 11 of the U.S. Bankruptcy Code, Awrey Bakeries Inc. will likely find itself nestled in the portfolios of two private equity firms with sweet spots for turnaround situations. Late last month, Hilco Equity Management LLC and Monomoy Capital Partners LLC won a competitive process to acquire the troubled bakery for $25 million. The deal is scheduled to close by the middle of this month.

The auction was run by Amherst Partners LLC, which, according to documents filed with the Southern Michigan Division of the U.S. Bankruptcy Court, approached more than 250 prospects, including both strategic and financial buyers. Other firms named as interested in Awrey are KPS Special Situation Funds (the firm Monomoy emerged from) and GESD Capital Partners. Hilco and Monomoy won the auction with the highest bid, according to the documents.

Once Hilco and Monomoy were granted exclusivity to Awrey, the duo was able to secure a break-up fee equal to 2.5% ($625,000) of the total purchase price-to cover the two firms’ out of pocket costs in connection with the due diligence and execution of the deal-which could be collected if the company went to another bidder. Once the deal is closed, Awrey will be placed in a holding company called ABI Acquisition Co., which was created by the two firms specifically for this deal.

Based in Livonia, Mich., Awrey produces and sells frozen baked goods, such as Danish pastries, doughnuts, croissants, layer cakes and breads for distributors and retail outlets throughout the U.S. and Canada. As of its February 2005 bankruptcy filing, the company, which counts Sysco Systems and Baskin Robbins as two of its larger customers, had approximately 330 employees and reported $34.4 million in assets and $29.2 million in liabilities.

“The [baked-goods] industry is currently coming out of some tough times that peaked in ’03 and ’04 that were tied to recessionary aspects, record-high raw material prices and the low-carb fad,” Ryan Bohr, a partner at Northbrook, Ill.-based Hilco, told Buyouts. These macroeconomic trends hit 95-year-old Awrey especially hard since it was concurrently dealing with internal situations such as labor and a non-efficient manufacturing process.

Despite Awrey’s current financial and operational standing, Daniel Collin, a principal at New York-based Monomoy, told Buyouts that the bakery’s potential clearly outweighs the risk. “The company has a longstanding reputation of providing quality services and products to the foodservices industry, and that’s not something you can replicate overnight. We think [Awrey] fits in the middle of our core investment strategy of buying sound franchises that are encumbered by fixable problems.”

In addition to overhauling Awrey’s balance sheet, restructuring its cost structure, negotiating a new contract with the existing labor union, and making improvements in the company’s manufacturing process, the buyout duo will also bring in a new management team to be led by CEO Alden Knowles, who hails experience in the baked-goods sector from companies like Hazelwood Farms and Quaker Oats, Collin said. “When the time is right, we will explore select add-on acquisitions and the possibility of entering new markets,” he added.

Equity for the deal will be split 60%/40% between Hilco and Monomoy, respectively. Hilco is currently investing out of its inaugural $73 million vehicle, Hilco Equity Partners LP, which held its final close in the second quarter of this year. Meanwhile, Monomoy, currently operating as a pledge fund, hopes to eventually include this investment in its own inaugural fund. Collin declined to speak to the specifics of any potential fundraising activity at Monomoy.

If completed, Awrey will represent Monomoy’s first transaction since its inception in March, Collin said.