Is Hostess Going Out of Business?

Twinkies (Hostess Twinkies is a trademark of I...

Weighed down by debt, management turmoil, rising labor costs and the changing tastes of America, Hostess decided on November 16th that it could no longer restructure its obligations through a chapter 11 bankruptcy and, instead, must  sell its assets and go out of business.

This is not the sequence of events that the maker of Twinkies envisioned when it filed for bankruptcy in January 2012.  After all, this was Hostess’ second chapter 11 filing in less than a decade, so it already had ample experience with the chapter 11 process.  The Company, who said that it was saddled with costs related to its unionized workforce, had hoped to emerge with stronger financials after restructuring its labor costs.

Prior to bankruptcy, Hostess had been contributing $100 million a year in pension costs for workers.  After filing, the Company offered workers a new contract that would have reduced the pension costs to $25 million a year, in addition to wage cuts and a 17 percent reduction in health benefits.  But, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, Hostess’ second largest union, rejected this proposal and elected to go on strike on November 9th.  This was the final blow to Hostess, which had already been operating on razor-thin margins.

But there is recent hope that a deal with the union can be struck.  After Hostess made its announcement on Friday, the bankruptcy judge intervened in the process.  Judge Robert Drain said at a hearing this Monday that the parties haven’t gone through the critical step of mediation.  The Judge then asked the lawyer for the bakery union, which represents about 30 percent of Hostess’ workers , to ask their clients if the union would agree to participate in mediation.  The Judge noted that the bakery union went on strike even though it never filed a formal objection to the new contract offer with the Court.  According to the Judge, “[m]any people, myself included, have serious questions as to the logic behind this strike.”

Bakery, Confectionery, Tobacco Workers and Gra...

Hostess and the bakery union ultimately agreed to mediation, which is supposed to commence immediately.  The CEO of Hostess, Gregory Rayburn, warned, however, that the two parties will have to agree to contract terms within a short period of time, because it is costing the Company $1 million a day in overhead to wind down its operations.   Even if a contract agreement is reached, it is not clear if all 33 Hostess plants will continue to be utilized by the Company.

Nonetheless, to the fans of Ho Ho‘s and Ding Dongs, there should be little fear that these brands will go away.  Even if the mediation is not successful and Hostess is forced out of business, its popular brands will likely be bought and continued by a willing purchaser.  Indeed, the Company says several potential buyers have expressed interest in these brands.  Although Hostess’ sales have been declining in recent years, the Company still generates approximately $2.5 billion in sales per year.  Twinkies alone brought in $68 million so far this year.

If Hostess must sell its assets, it will proceed according to section 363 of the Bankruptcy Code, which requires the bankruptcy court to approve the sale.  Before any sale can be agreed to, Hostess is likely to ask Judge Drain to set up procedures to conduct a competitive auction for its assets, so that the Company can review several bids before selecting the highest and best offer.