Warm Southern Breeze

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Hostess Twinkies go Bye-Bye… for now. But why? Who’s to blame?

Posted by Warm Southern Breeze on Saturday, November 17, 2012

Who’s to Blame for the Hostess Bankruptcy: Wall Street, Unions, or Carbs?

By Jordan Weissmann

Try all of the above.

There are two important things to realize about this rather sad situation. First: Twinkie, Wonder, and all the other high-calorie marvels of culinary science Hostess sells aren’t going to disappear from shelves for good. One of its competitors will likely swoop in, buy them up, and restart production. So you can stop bidding on $100 boxes of Sno Balls on eBay.


Hostess Brands, the maker of Twinkie and Wonder Bread, is getting ready to bake its last corn-syrupy snack cake. After failing to win major contract concessions from one of its key labor unions, the beleaguered 82-year-old company has asked a federal bankruptcy court for permission to start liquidating its assets — or, in real person speak, begin the process of selling off pieces of the company to the highest bidder while laying off most of its 18,500 workers. (Reuters)

Second: This is not a simple story that anybody should try to slot neatly into their political talking points. It’s not just about Wall Street preying on Main Street, or big bad labor unions sucking a wholesome American company dry. It’s about an entire galaxy of bad decisions that will cost many people their jobs and money.

As David Kaplan chronicled at length for Fortune earlier this year, the roots of this debacle go back to when Hostess entered its first bankruptcy in 2004. Not unlike the situation automakers would find themselves in a few years later, the company was collapsing under the weight of flagging sales, overly generous union contracts replete with ridiculous work rules, and gobs of debt. But unlike the automakers, the five years Hostess spent trying to fix itself in Chapter 11 didn’t fix its fundamental problems.

Instead, they set the stage for its eventual demise. A private equity company, Ripplewood Holdings, paid about $130 million dollars to take Hostess private, and the company’s two major unions, the Teamsters and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, sacrificed about $110 million in annual wages and benefits. But its labor contracts were still deeply flawed. Worse yet, the company left bankruptcy saddled with more debt than it went in with — “an unusual circumstance that the company justified on expectations of ‘growing’ into its capital structure,” as Kaplan put it.

Suffice to say, Hostess didn’t do much growing. It continued to lose hundreds of millions of dollars making and selling starchy snacks that much of the public had lost its taste for, while failing to launch any great new products. The interest on its loans swelled the company’s debt. By January 2012, it was back in Chapter 11, trying to wrestle a new contract with more concessions from its unions.

Hostess insisted that unless workers accepted further cuts, the company would have to shut its doors for good. That’s the sort of threat that distressed companies often make in labor negotiations, and unions are inclined to consider it a bluff. But after getting a look inside Hostess’ books, the Teamsters concluded that the threat was serious. Its members narrowly approved the contract in September.

The bakers’ union, which represents about a third of the Hostess’ workforce, did not. Instead they launched a strike last week that Hostess CEO Greg Rayburn says forced the company to take the final, dramatic step of liquidating everything and firing workers. Per the AP:

Although many workers decided to cross picket lines this week, Hostess said it wasn’t enough to keep operations at normal levels; three plants were closed earlier this week. Rayburn said Hostess was already operating on thin margins and that the strike was a final blow.”The strike impacted us in terms of cash flow. The plants were operating well below 50 percent capacity and customers were not getting products,” Rayburn said.

It’s not clear what, other than perhaps a misplaced faith that belief that they really did have the upper hand, might have convinced the bakers to strike. Certainly, the Teamsters all but begged them to accept the new contract. Some, interviewed by CNNMoney, said that their jobs simply weren’t worth saving at the pay levels Hostess was offering. If that was really the prevailing opinion, it’s a pity, because a lot of people at that company did seem to believe their jobs were valuable enough to hold onto, even if at a lesser pay grade.

Already, a few parties have tried to politicize this affair. The AFL-CIO today called it “a microcosm of what’s wrong with America, as Bain-style Wall Street vultures make themselves rich by making Americans poor.”  GOProud sent a winking blast email headlined “Unions Kill Twinkies” (literally, they wrote in a wink).

Both takes are exceptionally reductive. Let’s look at Wall street first. The private equity guys will likely lose most of their investment, since their stake in the company will be worthless. It’s also not clear that the hedge funds and other lenders that supplied Hostess with its mountain of loans will fare much better. When it entered Chapter 11 this year, the company owed around $935 million, if you include the additional loan it took out to keep the lights on and creme flowing. Meanwhile, Reuters reports that the company listed $981.6 million worth of assets in its bankruptcy filing. There’s virtually no chance they’ll sell for that much in a liquidation. One of the failed bids to buy the whole company out of its last bankruptcy valued it at just $580 million.  And that was when it was a going operation. If you factor in the interest payments Hostess has been making on its loans, some of the creditors might end up making out ok. But it doesn’t seem likely anybody will make a killing.

In short: the smart money guys larded Hostess with too much debt and never figured out a real plan for fixing its business. They’re coming out with a loss as a result.

As far as the unions go: You can blame them for not making enough concessions. You can blame the bakers for administering the final death blow. But you can’t blame them for management’s strategic incompetence, or the decision to try to run a flailing company on debt, hope, and empty calories.

There’s more than enough blame in this story for everyone involved to have a taste.

http://www.theatlantic.com/business/print/2012/11/whos-to-blame-for-the-hostess-bankruptcy-wall-street-unions-or-carbs/265357/

5 Responses to “Hostess Twinkies go Bye-Bye… for now. But why? Who’s to blame?”

  1. jvlivs said

    Wow. That just flat-out sucks (tail), man. Years ago we used to go to the Hostess factories and get our bread and cakes fresh! In my area (Detroit), we had the Wagner Bakery (which later became the home of Wonder Bread), which within the past decade plus became the Motor City Casino. Prior to that, we had the Hostess Headquarters on the northwest side of town which within the last five years became a storage place leaving Hostess/Wonder only a fraction of its former HQ being a small store. I’m kinda heartbroken to see these guys fold up after 82 years in business. And ironically, my union, AFSCME, is affiliated with the AFL-CIO. And I can tell ya from personal experience that pissing away people’s livelihood and selling out loyal, hard-working people is definitely a format of theirs. Both, in my opinion are very spineless.

    Maybe I’m being judgmental, but I’m only speaking from my past dealings with my union over the course of almost two decades.

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    • Warm Southern Breeze said

      Hi Bob! Good to hear from you! Several years ago, there was a bakery in Huntsville, AL, although it was a Colonial branded bakery. The building which housed their facilities is now used for other businesses. It seems to me, that extreme greed (also known as “avarice”) is to blame for many modern businesses’ failures. From “Chainsaw” Al Dunlap, to today’s “vulture” capitalists – including Kenneth Lay with Enron, Congressman Tom DeLay, HealthSouth’s Richard Scrushy, and others – extreme greed has guided those men’s thieving hearts.

      Of course, that’s not to say that unions are blameless in their dealings, either – for they certainly bear some burden of responsibility, as well. However, for several years I have wondered why some unions don’t purchase either controlling interests or stockholder stakes in publicly traded firms, so that they (by and through their members) can have a say in how the business is run. In my estimation, that would be the reasonable thing to do.

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