Business Combination

The following summarizes the fair value of the Business Combination:



(In thousands)
Cash paid	$	479,761
Equity consideration paid (1)	239,323
Tax receivable arrangement payable	161,681
Total consideration	880,765
Hostess Holdings debt assumed by Gores Holdings, Inc	1,228,254
Noncontrolling interest (2)	326,601
Fair value of the Business Combination	$	2,435,620

(1) Equity consideration paid to the Legacy Hostess Equityholders is summarized below:



(In thousands, except share data)
Class A common shares of the Company subject to six month sales restriction	22,098,139
Fair value per share	$	10.83
	$	239,323

(2) The class B units in Hostess Holdings, LP, which are not owned by the Company, represent the noncontrolling interest as provided below:



(In thousands except share data)
Class B units of Hostess Holdings, LP subject to six month sales restriction	24,424,259
Fair value per unit	$	10.83
	$	264,515



(In thousands except share data)
Class B units of Hostess Holdings, LP not subject to sales restrictions	5,446,429
Fair value per unit	$	11.40
	$	62,086

The fair value of these units was determined as follows:



Per share price based on average market price on the day of the Business Combination	$	11.40
Discount for lack of marketability	5.0		%
	$	10.83

The 5% discount for lack of marketability was determined by using an option pricing method (Finnerty Protective Put Model) to reflect a six month sales restriction.

The Company recorded an allocation of the purchase price to Predecessor’s tangible and identified intangible assets acquired and liabilities assumed, excluding long-term debt, based on their fair values as of the closing date. The purchase price allocation is as follows:



(In thousands)
Cash	$	58,519
Accounts receivable	58,474
Inventories	39,338
Prepaids and other assets	2,998
Property and equipment	155,076
Accounts payable and accrued expenses	(56,559		)
Deferred tax liabilities	(352,531		)
Trade name and trademarks	1,408,848
Customer relationships	542,011
Goodwill	579,446
Total assets acquired and liabilities assumed	$	2,435,620

Goodwill is attributed to intangible assets which do not qualify for separate recognition, and is partially deductible for income tax purposes.

From January 1, 2016 through November 3, 2016 (the Predecessor) approximately $31.3 million of expenses were incurred directly related to the Business Combination. From January 1, 2016 through the date of its last filing for the nine month period ending September 30, 2016, Gores Holdings incurred $4.0 million of transaction related expenses. From October 1, 2016 through the Closing Date, Gores Holdings incurred $6.7 million of expenses related to the Business Combination. On the Closing Date, the Company paid $13.1 million of deferred underwriting costs related to Gores Holdings’ initial public offering and repaid a working capital loan of $0.2 million.

During the measurement period which started on the Closing Date and ended on November 3, 2017, the Company revised its preliminary estimate of the future cash tax savings under the tax receivable agreement. This resulted in an $8.1 million decrease in goodwill, a decrease to the tax receivable agreement liability of $3.0 million, a $5.5 million decrease to deferred tax liabilities, and an increase to accrued expenses and other liabilities of $0.4 million. The Company also revised its estimate of deferred tax liabilities which decreased both deferred tax liabilities and goodwill by $0.9 million. As of November 3, 2017, the allocation of the purchase price for the Business Combination is final.

The following unaudited pro forma combined financial information presents the Company’s results as though the Business Combination had occurred at January 1, 2016. The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP:



	Year Ended December 31, 2016
(In thousands)	(Pro Forma)
	(Unaudited)
Net Revenue	$	727,586
Net Income	82,442

On May 10, 2016, the Predecessor purchased the stock of Superior for $51.1 million, $49.7 million net of cash acquired. Superior is located in Southbridge, Massachusetts and manufactures eclairs, madeleines, brownies, and iced cookies. The Predecessor acquired Superior to expand its market and product offerings in the In-Store Bakery section of grocery and club retailers. The Company expects to realize synergies and cost savings related to this acquisition as a result of purchasing and procurement economies of scale and general and administrative expense savings, particularly with respect to the consolidation of corporate related functions and elimination of redundancies.

The acquisition of Superior was treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. The allocation of purchase price is considered final. The following is a summary of the allocation of the purchase price:



(In thousands)
Cash	$	1,009
Accounts receivable	2,122
Inventories	2,300
Prepaids and other current assets	112
Property and equipment (1)	7,075
Intangible assets (2)	29,370
Goodwill (3)	24,227
Accounts payable	(2,920		)
Accrued expenses	(552		)
Capital lease obligation	(799		)
Deferred tax liability	(10,844		)
Total assets acquired and liabilities assumed	$	51,100


(1)	Amounts recorded for property and equipment includes land, building, plant machinery and equipment.


(2)	Amounts recorded for intangible assets includes customer relationships, trade names and trademarks.


(3)	Amounts recorded for goodwill are generally not expected to be deductible for tax purposes.

The fair value measurement of tangible and intangible assets and liabilities was based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows, appraisals, and market comparables.

From January 1, 2016 through November 3, 2016, the Predecessor incurred acquisition‑related costs for Superior of approximately $0.6 million. For the period from January 1, 2016 through November 3, 2016 (Predecessor) net revenue and net income for Superior was $19.9 million and $0.7 million, respectively. For the period from November 4, 2016 through December 31, 2016 (Successor), net revenue and net loss for Superior was $6.8 million, and $0.1 million, respectively.

The acquisition of Superior was deemed not material to the Company under Item 3-05 of Regulation S-X, and, therefore, separate financial statements are not required because Superior does not meet the definition of a “significant subsidiary”.