March 2013

While Hostess Crumbles, Twinkies Will Survive

Although the demise of Hostess has been well publicized, veteran turnaround advisor Ted Gavin examines the chain of events that led up to what he says could be labeled “the most mutually destructive collective bargaining agreement negotiation in crème-filled history.”

Hostess Twinkies: Born 1947 – Died Christmas 2012. In the spring of 2013, Hostess’ brands and facility will be carved up, like an incredibly tasty Thanksgiving turkey of comedic health impact and sold to a variety of bidders. The tale of Hostess’ crash-stop in bankruptcy is familiar. The unsecured claims of the union pensioners have been fixed, the sale and auction procedures have been approved — now, it’s all over but for the auctioneer’s gavel and the hopes of 19,000 displaced employees that they might have jobs. What can stand more examination, however, is the chain of events that brought the venerable American snack cake and bread maker to its sugary demise. For that, we examine the lead up to what may, in retrospect, be called the most mutually destructive collective bargaining agreement negotiation in crème-filled history.

Anatomy of a Bankruptcy

Hostess Brands entered Chapter 11 on January 11, 2012[1] with $1.4 billion of debt, and $479 million in cumulative operating losses in the two years since they emerged from their previous Chapter 11 case.[2] The 2012 case was filed to effect a turnaround plan, the central goal of which was modifying the terms of the debtors’ contracts with its unions to allow for reduction of costs associated with the 372 collective bargaining agreements to which Hostess was a party. The plan was also meant to remove obstacles to modifying operations in order to respond to market changes and customer preferences.

Among the terms in the agreements that the debtors sought to change were what the debtors termed “archaic” work rules, including the mandated use of short-run routes that could be served by more efficient, long haul routes which would ultimately reduce costs.

The Hostess order cycle was based on the local customer routes and relationships through route sales representatives (reps). A rep visited a customer and entered an order in a hand-held device, which transmitted the order to the company’s planning system. Orders were consolidated and a baking schedule was built for each product ordered. Simultaneously, the company’s operations systems built a shipping schedule that provided for space and cost efficiency. Once these two processes ran, the production and delivery schedules were finalized. This process took less than twenty-four hours.

Baked products were consolidated at a warehouse and forwarded to the depot to which the rep was assigned, and the rep would deliver and stock the product to the ordering customer. This happened for 175,000 customers per week. To change any part of a process that affected 19,000 employees, 82% of whom were subject to collective bargaining agreements and more than 14,000 of whom belonged either to the International Brotherhood of Teamsters (Teamsters) or the Bakers, Confectionery, Tobacco Workers & Grain Millers International Union (BCT), the debtors were going to have to change their collective bargaining agreements.

On January 25, 2012, the company filed motions seeking to modify collective bargaining agreements and retiree benefit obligations (by limiting the debtors’ ongoing obligations to the multi-employer pension plans) pursuant to §1113(c) and §1114(g) of the Bankruptcy Code.[3] Subsequent to the filing of the motions, the company engaged in negotiations with the Teamsters, but was unable to reach an agreement. According to the debtors, BCT declined to negotiate with the company.

In May 2012, many of the collective bargaining agreements between the company and the BCT locals expired according to their own terms. The court also entered an order authorizing Hostess to reject and modify the BCT bargaining agreements. The court denied the company’s motion to reject the Teamsters agreements but indicated that some of the relief sought by Hostess with respect to the Teamsters contracts would be granted, provided the debtor made changes to the relief it requested. As the company and the Teamsters negotiated how the debtors would deal with participation in the numerous Teamster multiemployer pension plans, Hostess’ outside investor that had been funding the company announced it would no longer invest in the company, leaving the debtors without future funding.

In response to this serious change in circumstance, Hostess and its lenders invited the unions to negotiations to resolve these issues, and to allow the company to emerge from bankruptcy intact. The Teamsters agreed — the BCT declined to resume discussions until the Teamsters’ discussions were concluded. Four months after negotiations started, with what the company termed its “last, best and final offer” on the table, the Teamsters approved the modifications in September 2012. In August 2012, Hostess presented the BCT with what it termed the functional equivalent of the same “last, best and final offer” presented to the Teamsters. By the same date on which the Teamsters approved the modifications, the BCT overwhelmingly rejected it. Only three locals voted to approve Hostess’ offered modifications.

With the unions split on approving the new terms, the debtors found themselves asking the court to impose the modifications upon the BCT.[4] Based on the motions filed and the testimony provided, there was a fundamental difference of opinion between the union and the company as to what options were available to the company. The union appeared to believe that there was an angel waiting, ready to purchase the company. The debtors insisted that no such purchaser existed. In retrospect, perhaps the union couldn’t have been more wrong in its views.

In early October 2012, the court entered an order allowing the company to reject the BCT agreements and implement the modifications requested and, with respect to the agreements in place with 18 locals that had rejected the modification terms, to implement the modifications pending such time as the company and those unions had “bargained to impasse” as that term applies to the National Labor Relations Act. Throughout the rest of October 2012, the company modified the collective bargaining agreements of all of its remaining unions either with consent of the union members or by court order.

Between November 9 and November 13, 2012, BCT locals picketed at 24 of the company’s 36 bakeries, disrupting or ceasing operations at two-thirds of the company’s production facilities. This disruption impacted some or all of the 175,000 customers per week that the company served. A brief review of the company’s financial operations at this time shows that, according to the debtors’ Monthly Operating Report filed with the bankruptcy court for the period ending September 22, 2012[5] (which was filed on October 26, 2012 — so the BCT would have had access to this information before striking), the company had approximately $37.2 million in cash and had borrowed $7.5 million from their DIP credit facility that month — more than 10% of the total available balance.

The problem got worse — in the next month, the debtor then had to borrow more than $28 million to meet expenses and was not taking in enough cash to meet those expenses. A strike that disrupted cash-flow to a company living hand-to-mouth could not have come at a worse time for the viability of the business.

On November 16, Hostess filed an emergency motion[6] with the court seeking permission to wind the company down and sell off the assets because of a lack of funding and a lack of options for continued survival in the face of the work stoppage and the idling of plants and, therefore, cash-flow. The BCT agreed that a sale of the company was the only option available — but the union still seemed to think that there was an ongoing and robust sale process with interested purchasers about which the debtors were keeping — and I quote — “mum.[7] [8] The court ordered the parties to mediation, which failed. There were news reports and rumors about a variety of purchasers trying to pull a deal together, but none of these rumors came to pass and, on November 27, 2012, the court granted the company’s motion to wind down the business.

What’s the takeaway from all of this? If the BCT knew that a strike would have crippled the company and threatened administrative insolvency, would they have done anything differently? I prefer to view it in the context of deal fatigue. The only thing more exhausting for both the company and the unions than renegotiating a collective bargaining agreement is re-negotiating 372 of them. It’s possible that the BCT didn’t realize that disruption could also kill the company, and thereby failed to realize that the same leverage might have gotten a better deal in the form of long-term upside. Perhaps the need to go back and renegotiate changes like that with the Teamsters would have taken so long that it would have doomed the company regardless.

In the end, a few things are clear. The court has approved auction procedures to sell off the brands to different buyers — Wonder Bread and its partner brands to one baker; Twinkies and some snack cakes to another; still more brands to Dolly Madison or a better bidder. But it is the tangential parties who will suffer. The customers who no longer experience economies of scale from purchasing an entire range of products from one bakery and pay the price for that with, well, higher prices. The union rank and file who may or may not have jobs with new buyers. The back-office people and salespeople made redundant in the combination with new owners. The pensioners, whose last payments for medical care are made this month, left with unsecured claims. The Twinkies will live on — we can stop buying them on eBay.

Ted Gavin, CTP is a managing director and founding partner of Gavin/Solmonese LLC, a national turnaround, restructuring and public affairs advisory firm and the successor to NHB Advisors, where he led the firm’s Bankruptcy & Fiduciary Services practices. He is a member of the Board of Directors of the American Bankruptcy Institute.

[1] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd
[2] In re Interstate Bakeries Corporation; United States Bankruptcy Court for the Western District of Missouri. Case No. 04-45814
[3] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 174
[4] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1483
[5] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1649
[6] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1710
[7] United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No.1748, P. 2.
[8] Seriously?