Whatâs
Wrong Today:
In a small victory in the battle against
childhood obesity, private equity-backed Hostess Brands Inc. went
back in the bankruptcy oven today,
filing for Chapter 7 liquidation, nearly three years after exiting from its
first bankruptcy filing, and 11 months after its second Chapter 11 filing.
Management says that the financial toll is due to out-of-control labor costs
and pension and medical benefit obligations borne by the maker of Twinkies and
Wonder Bread.
Hostess
has about $2.5 billion in sales
from a long list of iconic
consumer brands of snack cakes and breads such as Butternut, Ding Dongs, Dolly Madison, Drake’s, Home Pride,
Ho Hos, Hostess, Twinkies, Yodels, Wonder, Merita and Nature’s Pride. The
company says it has suspended operations at all of its 33 plants around
the United States as it moves to start liquidating assets.
The liquidation could cost as many as 18,500 jobs
nationally.
In the conservative
press, the Hostess liquidation is taking on the narrative of an out of control
union management forcing its members to the unemployment line and forcing the end
of an iconic brand.
Why? Because Hostess had given some striking union employees
a deadline to return to work on
Thursday, but the union would not end its strike, saying it had already
given more in concessions than its workers could bear and that it would not
bend further. This was despite the fact that Hostess had already reached an agreement on pay and benefit cuts with the
International Brotherhood of Teamsters, its largest union.
Management makes the point that it had made deals with 70% of its unionized employees, but
not with its largest unsecured
creditor, the Bakery & Confectionery
Union which, through its pension fund, is
owed $944 million of the $980 million the company owes to unsecured creditors.
Hostess also owes $860 million in secured debt.
Hostess has 19,000 employees, 83% of whom
are members of unions working under
372 collective bargaining agreements (CBA). The employees belong to 12
separate unions. On average, that
means there are only 51 employees per CBA at Hostess.
The company is majority owned by private equity
(PE) firms; Ripplewood Holdings owns 68.56% of Hostess’ equity, while Silver
Point Finance owns 12.28%.
Union officials blamed mismanagement for the company’s
woes. Union President Frank Hurt said
in a statement that the company’s failure was not the fault of the union
but the “result of nearly a
decade of financial and operational mismanagement” and that
management was trying to make union workers the scapegoats for a plan by Wall
Street investors to sell Hostess.
As Deal
Pipelineâs Jamie
Mason reported, the company first filed for Chapter 11 as Interstate
Bakeries Corp. on Sept. 22, 2004, in the US Bankruptcy Court for the Western
District of Missouri in Kansas City. The debtor exited from bankruptcy
protection 4-1/2 years later on Feb. 3, 2009.
Since its exit from Chapter 11, the
debtor’s financial performance hasn’t kept pace with the projections set forth
in its reorganization plan:
- For the 2010 fiscal year, the company had a net loss of $138
million - In 2011, the company had a $341 million net loss
The proposed deal with the various unions, according to the Chicago Tribuneâs Phil
Rosenthal, looked like this:
Wages
would drop 8% across the board, including managementâs, with the promise of a 3%
increase in each of the 2nd through 4th years of the five-year
deal, with a 1% increase in year 5.
There
also would be sharp reductions in pension plan payments.
The
company reduced executive pay in April
and Chief Executive Gregory Rayburn said the company’s lawyers, bankers and
other bankruptcy advisers would forgo $60 million in fees, an 18% discount.
Union members stood
to get a 25% equity stake in the company and would be in line for $100 million of the recovered
debt, plus two of the company’s eight board seats and one seat on the board’s
executive compensation committee.
Sounds like an acceptable
deal to the Wrongologist.
But, maybe the union gets to move their pension liability to the US government via the
Pension Benefit Guaranty Corp like this Hostess pension
plan did in the prior bankruptcy, possibly a better deal for the union than
the PE guys are offering. In any event, while
the bakerâs union didn’t agree to this round of cuts, they had agreed to others
in the past.
And those cuts also came with promises that were not kept.
Hostess had poor management for many years, so it is understandable
that when you work for a company that’s
operated under Chapter 11 protection for 5 of the past 8 years, the
next new deal would test the union and its workers’ faith, even with new
management.
Instead
of turning this into another job creator vs. union parable, how about realizing that this was a
poorly run company and past leadership had just brutalized it?
Both sides contributed to this
situation. We can’t blame the unions for taking a stand, at some point you have
to take a stand. For those who don’t
understand that, it’s called PRIDE. How about accepting that the union
gave what they believed they should/could in the past and the company didnât get
back to profitability?
You
canât blame the current management;
they are just trying to turn the company around. Maybe they are just trying to
make the union succumb to public opinion and really will avoid liquidation in
the end.
However, with $2.5
Billion in sales, it is certain that a
new investor will buy the Hostess assets. The new investor will not have
to restructure the legacy debt or deal with inflexible work rules.
Letâs hope the new
investor offers pensions, sick leave, vacation and medical benefits. All workers deserve them.
So, it isnât really the
end of the Hostess brand. And for all those kids and parents who grew up on
Wonder Bread and Twinkies….they will be back.
Probably
without the unions. Letâs just leave it at that.
