Hostess' Liquidation Attempt Half-Baked!

Hostess' Liquidation Attempt Half-Baked!
Twinkie the Kid, image courtesy of Google Images

UPDATE - Monday, 11/19/12 @ 5:30pm CST

Stop the sobbing and cancel your eBay bids!  The judge presiding over the Hostess Bankruptcy case has called for a bake-off!

In a ruling in White Plains New York this afternoon, Judge Robert Drain was unwilling to pull the plug on Hostess (sorry for the bad pun) and instead has ordered the company and the Baker's Union to mediation.  Talks will begin Tuesday and if an agreement can be reached within 24 hours, Hostess will be prevented from liquidating its assets in bankruptcy court.

While this news brings hope to marijuana enthusiasts nationwide, it does not bode well for budding entrepreneurs seeking to cash in on the half-life of the nearly-extinct Hostess Twinkie with inflated eBay auctions.  But then again, this story isn't about Twinkie aficionados - it's about the 18,500 workers who were set to lose their jobs and a huge chunk of their pensions had Hostess closed for good.

Here's the fully baked story from my post earlier today:

7am EST, Friday, November 16, 2012 – yet another day that will live in infamy.

On that fateful morning, Americans awoke to the tragic news.  Was it a terrorist attack?  No.  Another superstorm making landfall?  No.  A trading glitch that crashed the market?  No.  A new war brewing in the Middle East?  Yes - but that was neither new or surprising.  Friday’s news was far more shocking than anyone could ever have imagined.

Hostess Twinkies were dead and the greedy baker’s union had killed them!

Without time to think, stunned Americans skipped their morning lattes and headed straight for the 7-11, praying they weren’t too late to snag a package or twelve.  Stay-at-home moms skipped morning Zumba and drove feverishly from supermarket to supermarket, hoping they weren’t too late to stock up.  Budding eBay entrepreneurs descended on Hostess outlet stores looking for a treasure trove to line their PayPal accounts with.  Those arriving too late had to settle for Cupcakes, Ding Dongs, Ho Hos, Zingers, and fruit pies (fruit pies?).  Marijuana enthusiasts, still on a high from pot legalization victories in Colorado and Washington, slept right through it and were left empty handed – oh the irony!

With expiration dates measured not by shelf life, but rather half-life, there really was no worry as to whether Twinkies could be preserved for generations to come.   They just had to be acquired first.

As the morning talk shows spread the startling news, nary a tear was shed for the 18,500 workers who would be out of a job within the next week.  Any sympathy exhibited was purely selfish – what does the loss of the Twinkie mean to me, me, me?  Denial tends to do that to the grieving…

I have to admit that my first thoughts were nostalgic.  I remember my first Twinkie.  Actually, no I don’t.  I remember my mom packing my lunch box with a Twinkie and a Snack Pack pudding every day during grade school.  Hard to say which posed a greater risk to my future health – the 5 grams of fat and 19 grams of sugar in the Twinkie or the tongue-lacerating metal lid of the Snack Pack…

My relationship with the Twinkie waxed and waned over the years.  Volatile market pricing forced my mother to substitute the smaller Ding Dongs and Ho Hos in times of economic uncertainty.  A wandering sweet-tooth led me astray and I was tempted by the forbidden fruit of the raspberry Zinger – artificial as it was.  The supple smoothness of Cupcakes in their bra-like packaging mystified me during puberty.  The soothing shape and spongy feel of Sno Balls were also very alluring for some unexplained reason.  As the 70s melted into the 80s and I moved into adulthood, something was changing that I could no longer put my finger on.

That change turned out to be the addition of high fructose corn syrup to prepackaged snacks beginning in the mid 80s and continuing through to today.  The Twinkie and his sugar-saturated brethren became sickeningly sweeter – too rich for my blood (both figuratively and literally).  The Hostess of my youth had been tainted right alongside new Coke.

The Twinkie died long before Hostess’ current owners blamed the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) for its demise in a press release issued November 16, 2012.

The saddest part of this story, to me, was how the news media took Hostess’ press release and published it verbatim – never once probing the accuracy of the assertions made.  A simple Google search would have shown a troubled company filing its second bankruptcy in the past eight years.  A few more clicks and a comprehensive analysis could have been written - similar to this excellent explanation I found today on Zerohedge.com.

Turns out Hostess wasn’t being 100% truthful with the public…

The first time the company emerged from bankruptcy in 2009, it had managed to secure $100 million in annual labor cost savings from union concessions including significant job losses, pay cuts and benefit decreases.  Today’s current employment of 18,500 is down from 32,000 when it filed for bankruptcy protection in 2004.

The company also emerged owing more money than it had going into bankruptcy.  Its cost of goods went up for commodities like corn, sugar, and flour, as well as increases in energy costs.   The new Hostess faced an uphill battle regardless of payroll expenses and despite $100 million in annual payroll savings.

Sales for 2011 were down 28% from 2004 levels, 11% from 2010 to 2011 when it lost $340 million.  Its debt rose from $670 million to $860 million, including a $75 million loan from its hedge fund owners at 15% interest.

At the time of Friday’s announcement, Hostess had $2 billion in unfunded pension obligations and was willing to offer its union workers 25% equity in the reorganized company and a $100 million IOU if the BCTGM would cut its pay a further 8% and health coverage by 17%.  The Teamsters had already made another round of concessions.  92% of members in the BCTGM union approved a walk-out on November 9th – most believing that the company would fail regardless.

Hostess’ problems were not brought on solely by overpaid union workers, yet these career employees will lose the most when the company is liquidated.

18,500 workers will lose their jobs.  Pension benefits for current and past employees will be reduced when the fund is declared insolvent and rescued by the federal government’s Pension Benefit Guaranty Corporation (PBGC).  As consumer demand for Hostess’ products is satisfied by its remaining competitors, less jobs are likely to be created for these displaced workers than those that are lost.

The venture capitalists that hold Hostess’ secured debt have little to lose from a court-sanctioned liquidation.  The sale of the company’s assets – brand names, recipes, bakery equipment, trucks, etc - should make these equity holders whole.  The management group that acquired Hostess out of bankruptcy, on the other hand, will likely be out its full $170 million investment as its debt is subordinate to all others and its equity position is worthless with a shuttered company.

Details on the exact causes of the company’s year-over-year sales declines are hard to find without subscribing to an investor data service.  It is widely quoted that sales of the brand’s most popular product, the Twinkie, is down 2%.  One can reasonably assume that beyond decreased demand for snack cakes there must be a significant consumer rejection of stale products like Butternut and Wonder Bread.  One analysis I read cites the introduction of the company’s healthiest product offering, Nature’s Pride Bread, as too little, too late.

Friday may have come and gone like Twinkies on a gas station shelf, but this story is far from written.

Hostess’ iconic brands will find new homes in other bakeries, distributed by other drivers in other trucks.  Some of the bakeries might be acquired.  Some of the employees may be hired elsewhere as the void left by Hostess increases demand elsewhere.  Our government will pick up the unemployment benefits tab, as well as guarantee a portion of paid-in pension obligations.  It's up to the media to provide us with periodic follow-up, but don't count on it...

There are many narratives to this American tale.  Iconic products with nostalgic appeal that people no longer buy.  Unhealthy food items that a growing number of people continually reject.  Mergers, acquisitions, buy-outs, and turnarounds based on unrealistic expectations.  Past promises made and future obligations unmet.  Jobs lost while investors profit.

It's not as simple as Twinkies Good, Unions Bad.  In fact, it's actually the opposite when you view this from the perspective of America's future health...

The Twinkie is dead.  Long live the Twinkie!

If you liked this post, share it on Google+, Facebook, and Twitter by clicking the boxes below the article title.

If you like this blog - which is usually about bicycling - fan it on Facebook and follow me on Twitter by clicking the boxes below my bio.

 

Leave a comment