There’s a difference between not believing in management and not
believing management’s inconvenient facts. At
Hostess Brands, some
employees didn’t make that distinction, and they could bring down the
company.
Hostess’ union workers have lost faith in their leaders
for good reason. The company filed for bankruptcy in 2004 and emerged
five years later with lower sales and higher debt. Despite the nostalgia
for Twinkies and Ding Dongs — and don’t worry, some bakery will produce
the brands — sugary junk food isn’t a growth market.
Yet a string
of
Hostess CEOs failed to develop new products, capitalize on
well-known names or invest in equipment, distribution and marketing.
Hostess’ truck fleet is 18 years old, and even before this month’s
strike, bakeries were running at 65 percent capacity.
Three years
ago, management didn’t use bankruptcy to whack pensions or completely
overhaul work rules. When Hostess filed its second Chapter 11 in
January, it still had 372 separate collective bargaining agreements and
80 different health plans.
It also has a big problem with workers’
compensation. About $231 million of Hostess’ cash is restricted for
those claims alone, leaving nothing for scores of other creditors.
Hostess’
debt load has been growing, too, thanks to payment-in-kind interest
that dug a deeper hole. Its private equity investor, hedge fund lenders
and management believed that Hostess would grow into the larger debt,
but the Irving company’s annual revenue is $1 billion smaller than when
it filed the first time.
So a failing business came out of
bankruptcy primed to fail again.
It’s understandable that union
workers, who took $110 million in annual cuts in the first
reorganization, would say, “It’s not our fault.”
While that’s
true, it doesn’t change Hostess’ prospects or the fact that management
was right about one important detail: If labor didn’t accept more cuts
in bankruptcy, Hostess was going to be sold off in pieces.
While
most employees gritted their teeth and went along, the bakers union,
representing about one-third of total employees, went on strike. With
production crippled, Hostess said it would seek to liquidate and
eliminate about 18,000 jobs. But on Monday, the company and the bakers
agreed to a judge’s request to return to mediation.
The bakers
union had justified the strike by recalling earlier sacrifices and
management mistakes, including executive raises. The company’s business
plan, the union said, had “little or no chance of succeeding.”
But
isn’t a little chance better than none? And isn’t it better to work for
a troubled company than to not work at all?
The Teamsters,
representing the largest union at Hostess, reluctantly embraced reality.
The union’s turnaround expert, Harry Wilson, told the bankruptcy court
that poor management had doomed Hostess. One example: Hostess made only
one notable innovation since 2009, Nature’s Pride bread, while
competitor Grupo Bimbo reformulated 1,300 products. Bimbo introduced
flatbreads, thin bagels, a broader line of cakes and pastries, and
products with better nutrition.
Not surprisingly, Wilson concluded
that unions weren’t the major problem. Base pay for Hostess Teamsters,
he said, was at least $6,000 per year lower than for union brothers at
Bimbo. Yet Teamsters still agreed to concessions, and they pleaded with
bakers to return to work, fearing that Hostess would be closed.
“This
is not an empty threat or a negotiating tactic, but the certain
outcome,” the Teamsters wrote last week.
Not just because
management said so; the Teamsters’ experts had studied the company’s
financial reports, and no better solutions existed.
Hostess’
reorganization plan, filed last month, documented the problems and
shared sacrifice. Ripplewood Holdings, the private equity firm that
invested almost $130 million three years ago, was to get nothing in
return. Holders of fourth-lien notes, owed more than $230 million, would
get nothing. Ditto for general unsecured claims, estimated at up to
$2.5 billion, including pensions.
Bankruptcy lawyers would get an
18 percent cut in fees; and union and nonunion employees, 8 percent cuts
in wages and a 17 percent cut in benefits. Retirement contributions
were suspended.
They weren’t good choices, but they were better
than hoping for a white knight. Hostess had called 41 parties before
landing a single investor, and that was contingent on cutting labor
costs and pensions.
In 2010, bankers also pitched
Hostess to
Bimbo, Flower Foods, Hershey, Kraft and more. In 2011, Hostess offered
individual brands, and only Mrs. Cubbison’s was sold — for just $15
million in proceeds.
There simply wasn’t much interest in a
company with $1 billion in assets and $2.5 billion in liabilities. The
smart money was waiting on a going-out-of-business sale.
