With its public listing on NASDAQ looming, there is a secret that Hostess Brands would no doubt prefer to keep from investors — the company is not the owner of the Twinkies brand in China (the world’s largest emerging consumer market).
Hostess, the long-time maker of Twinkies in the United States, has experienced a massive turnaround over the past few years. The company filed for bankruptcy in 2012, and was purchased out of liquidation in 2013 by private equity groups Apollo Global Management LLC and Metropoulos & Co. for roughly $410 million. After significant restructuring, Hostess returned to profitability and in July 2016 announced its sale to an affiliate of private equity company Gores Group at a valuation of roughly $2.3 billion.
As part of the acquisition, Gores Group declared its intent to take Hostess public on NASDAQ. Its affiliate Gores Holdings, which agreed to purchase Hostess, is in fact already a publicly-listed company, and Gores Holdings (NASDAQ: GRSH) shares have surged in value by nearly 20% since the Hostess acquisition deal was announced. Once the deal closes, the name of Gores Holdings will change to Hostess Brands, Inc.
While Hostess reported revenue of $650 million in the 12-month period that ended in May, and an adjusted profit of $220 million, some analysts believe Hostess is nevertheless a risky bet. After all, the company has gone bankrupt before. Additionally, the merger of Hostess Brands LLC with Gores Holdings was supposed to be official by the end of the third quarter, but it has yet to be completed and so far no neither company appears to have publicly released an explanation for the delay.
A key concern for any publicly-traded company is growth. After all, one of the primary justifications for taking Hostess public is to set the company up for long-term growth by providing better access to capital to fund future innovation and acquisitions.
However, many Americans are now trying to eat healthier and avoid high calorie snacks (like Twinkies). Moreover, the company’s international expansion opportunities are questionable to say the least, given the loss of its most famous brand “Twinkies” in China, a market where the consumer base has the potential to exceed $60 trillion over the next decade according to a leading think tank.
China trademark woes
Trademark registration and cancellation
The Continental Baking Company, the original maker of Twinkies in America, applied for registration of the “TWINKIES” trademark in China in 1991. The company was granted China Trademark Registration No. 584310, and held exclusive rights to the “TWINKIES” trademark for ten years (the initial trademark registration period specified under Chinese law) for the goods/services: cake (International Class 30). However, in 2002 the company failed to renew this trademark registration, even though Chinese trademark law specifies that a registered trademark is renewable indefinitely. Consequently, the trademark registration was cancelled.
After a series of mergers and acquisitions, The Continental Baking Company eventually became Hostess Brands in 2009.
Third-party trademark application
The “TWINKIES” trademark in China remained unregistered until 2013, when a French national (unaffiliated with Hostess) (hereinafter the “Applicant”) applied for registration of the trademark for the good/services: cake and confectionery (International Class 30). The Applicant’s trademark application was preliminarily approved by the China Trademark Office (CTMO) in 2014, at which time Hostess filed a timely opposition.
China Trademark Law provides that once a preliminarily approved trademark application is published in the Trademark Gazette, there is a period of three (3) months in which any person who has previous rights and/or who has reason(s) to believe that he would be damaged by the registration of a pending trademark may file an opposition. This period is not extendable. Given the short time for filing an opposition, most owners of major or valuable trademarks subscribe to the Trademark Gazette (which contains a list of all trademarks published for opposition) or retain a service that monitors the Trademark Gazette for publication of potentially conflicting trademarks.
In support of its opposition to third-party registration of the “TWINKIES” trademark in China, Hostess provided the following documents:
- screenshots from the Hostess website, including Chinese translations of some text;
- Wikipedia articles about Hostess and Twinkies;
- Google search results for “twinkies”;
- a copy of Hostess’ United States trademark registration for “TWINKIES” originally filed in 1960;
- screenshots from a Chinese directory website that translated a basic description of Hostess and Twinkies; and
- a DVD of American film and television clips in which “Twinkies” were referenced.
Based on this evidence, Hostess argued that because of its prior registration and use of the “TWINKIES” trademark in the United States, the Applicant’s registration of the “TWINKIES” trademark in China would likely cause customer confusion. Additionally, Hostess claimed that the Applicant had applied to register the “TWINKIES” trademark in bad faith, specifically that because the Applicant is a French national and baking is such a large part of French culture the applicant must have been familiar with Hostess Twinkies prior to applying for trademark registration in China.
In early- and mid-2015 the Applicant filed evidence with the CTMO in response to the opposition, arguing that Hostess had provided no actual evidence of bad faith, and that all of the company’s arguments were completely speculative. Specifically, even if Hostess could establish that “TWINKIES” is a famous trademark in the United States, the company had not proven that the trademark was used or famous in China (or France for that matter). The Applicant also argued that because Hostess (then the Continental Baking Company) had allowed its prior China trademark registration to expire, under China’s “first to file principle” other parties should be allowed to register the “TWINKIES” trademark.
The Applicant further provided evidence of its own use of the “TWINKIES” trademark in China, specifically use of the mark by the Applicant’s Chinese licensee for snack cakes sold at a number of Chinese coffee shops and cafes. Through such actual use in commerce, the Applicant argued, the “TWINKIES” trademark had gradually become known to Chinese consumers in connection with the Applicant’s licensee’s brand, and thus the trademark’s long-term use by the Applicant’s licensee would not cause confusion among the relevant public.
In January 2016, the CTMO published an Opposition Decision ruling against Hostess (citing a lack of factual evidence), and granting registration of the “TWINKIES” trademark by the Applicant (China Trademark No. 12128974).
The failure by Hostess to successfully oppose the Applicant’s trademark registration was compounded by a recent change in China Trademark Law that removed the right of appeal for an opponent whose opposition is rejected by the CTMO. Under the newest revisions to China Trademark Law, which took effect in May 2014, an unsuccessfully opposed trademark application will proceed to registration. The only option for an opponent is to then file an invalidation / cancellation action with the Trademark Review and Adjudication Board (TRAB), and invalidating / cancelling a trademark registration has historically been significantly more difficult than opposing a pending trademark application.
Because Hostess holds no valid trademark registration for “TWINKIES” in China, local manufacturers are free to use the Twinkies brand in connection with their goods/services. In fact, anyone can now use the Twinkies brand in China, to the extent that the Applicant does not diligently enforce its trademark rights. Specifically, while the Applicant’s licensee continues to sell Twinkies branded goods through multiple retail outlets in China, it is not hard to imagine copycat goods from unlicensed manufacturers hitting the market in the near future — after all, “This is China (TIC).”
The Applicant also recently recorded its “TWINKIES” trademark registration with China Customs (Customs Registration No. T2016-49710). Customs inspects all goods imported to or exported from China, and will notify a trademark registrant of any suspected goods bearing a recorded registered trademark. The trademark registrant can respond by filing requests for Customs to seize suspected goods, and such seized goods can be held by Customs pending further legal proceedings.
So what is an accurate valuation for Hostess Brands? At least some investors seem upbeat, already buying up shares of Gores Holdings, the NASDAQ-listed, special purpose acquisition company (SPAC) that will allow Hostess to go public without all of the song and dance required by the traditional IPO process (e.g., using the SPAC Hostess will not have to file nearly as much SEC paperwork nor go on a road show to sell its story to investors, but rather will simply merge into an existing public entity).
But do these upbeat investors know about Hostess’ China trademark problems, and are they factoring into their valuations the company’s correspondingly limited international growth prospects? Only time will tell, and so far the public does not even know when (if ever) it will see a Hostess symbol flashing across the NASDAQ stock ticker.
One thing is for certain — the value of China’s consumer market to Hostess definitely exceeds the relatively trivial cost of renewing a Chinese trademark registration.