Friday, November 16, 2012

Longform: Why Did the Twinkie Die?

Back in July David Kaplan did a deep dive into the recent history of Hostess.
From Fortune:
Caught in a fight between labor and hedge funds, the baker may finally have reached its expiration date.
FORTUNE -- Those Twinkies on your cupboard shelf may last forever. But the company that makes them may not.

Hostess Brands -- the owner of such iconic lunchbox snacks as Ding Dongs, Ho Hos, Suzy Q's, Dolly Madison Zingers, and Drake's Ring Dings, as well as Wonder Bread and the "Golden Sponge Cake with Creamy Filling," the 150-calorie food-science marvel called the Twinkie that drove Woody Harrelson mad in Zombieland -- is in federal bankruptcy court. Again. It's the second time in a decade -- which is why bankruptcy wags say the company is in "Chapter 22" rather than merely Chapter 11. Loaded down, astonishingly, with nearly $1 billion in debt, privately held Hostess faces oblivion if its creditors, owners, and unions can't agree on how to restructure.

So far, in a courtroom near Manhattan and in a negotiating room in downtown Washington, they haven't come close, although a deal could happen even as you read this. The dramatis personae are impressive: the Teamsters; two large hedge funds, Silver Point Capital and Monarch Alternative Capital; and the private-equity firm Ripplewood Holdings. In an acrimonious behind-the-scenes war -- refereed by a federal judge -- they wage hostilities over who will get what crumbs from a disintegrating corporate cookie; whether that business can and should be resuscitated; the degree to which fabulous pension plans are anachronistic; whether promises made in collective bargaining ought to be sacrosanct; and just how important it is to save 15,000 union jobs. "There aren't great options here," former U.S. House Majority Leader Dick Gephardt told Fortune. Gephardt is now a lobbyist and consultant with connections to Hostess and the Teamsters. "People will have to pick the one that's a little bit better."

The Hostess story is a microcosm of larger economic and political issues on the national stage, including the perils of debt and the inertia of unions on workplace reform. It unfolds during an electoral campaign in which President Obama is seeking to make an issue of the supposed predatory excesses of private investment funds, linking Mitt Romney's career at Bain Capital to the destruction of jobs.

But in truth there are no black hats or white knights in this tale. It's about shades of gray, where obstinacy, miscalculation, and lousy luck connived to create corporate catastrophe. Almost none of the parties involved would speak on the record. Still, it's clear from court documents and background interviews with a range of sources that practically nobody involved can shoot straight: The Teamsters remain stuck in a time warp, unwilling to sufficiently adapt in a competitive marketplace. The PE firm failed to turn Hostess around after taking it over. The hedgies can't see beyond their internal rates of return. Et cetera, et cetera, et cetera.
The critical issue in the bankruptcy is legacy pensions. Hostess has roughly $2 billion in unfunded pension liabilities to its various unions' workers -- the Teamsters but also the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (which has largely chosen not to contest what Hostess wants to do -- that is, to get out of much of that obligation). If the bankruptcy court lets Hostess off the pension hook -- which often happens in these cases -- it only moves the struggle outside the courthouse, and the ante goes up. For the Teamsters can then call a strike -- which its Hostess employees have already ratified by a 9-to-1 margin. If the court doesn't grant relief, Hostess can seek liquidation, which would mean that some creditors get some money, but equity would be gone for good, as would a lot of jobs. Either way, each side holds a nuclear warhead with which to annihilate the company.

It is an exquisite game of chicken, and neither side may change course....MUCH MORE
HT: the Washington Post's On Leadership column- "Why didn’t Hostess workers believe the threats?"

One fact that I haven't seen elsewhere is the open split between the Teamsters and the AFL-CIO affiliated BCTW-GMIU. It is a complete reversal of positions to that stated immediately above.
From the International Brotherhood of Teamsters:
Teamsters: Bakery Workers Should Hold Secret Ballot Vote at Hostess

 
Unannounced Strike Has Put Thousands of Jobs in Jeopardy 
(WASHINGTON) – Today, the Teamsters Union announced its recommendation to the Bakery, Confectionary, Tobacco and Grain Millers International Union (BCTGM) that a vote of its Hostess members by secret ballot should be held to determine if the workers want to continue their strike of the company and force it into liquidation.

On Wednesday, Nov. 14, Hostess Brands indicated that if it couldn’t resume normal operations by 5 p.m. EST on Thursday, Nov. 15 that it would have to begin the liquidation process. Teamster Hostess members and all Hostess employees should know this is not an empty threat or a negotiating tactic, but the certain outcome if members of the BCTGM continue to strike. This is based on conversations with our financial experts, who, because the Teamsters were involved in the legal process, had access to financial information about the company.

As stated previously, Teamster Hostess members have been frustrated by numerous missteps by a variety of Hostess management teams, but the union has tried to engage constructively to find a solution to preserve jobs. That comprehensive engagement has spanned 18 months....MORE

That Teamsters released followed the Nov. 14 announcement by Hostess:

Hostess to Liquidate if Strikes Impede Normal Operations Past 5 p.m., EST, Thursday
November 14, 2012 
Irving, TX – November 14, 2012 – Hostess Brands Inc. announced today that it will file a motion with the U.S. Bankruptcy Court on Friday to liquidate the entire Company if enough striking employees do not return to work by 5 p.m., EST, Thursday to enable the Company to resume normal operations. The strikes were called on November 9 by the Bakery, Confectionery, Tobacco Workers and Grain Millers Union (BCTGM).
 “We simply do not have the financial resources to survive an ongoing national strike,” said Gregory F. Rayburn, the Company’s Chairman and CEO.  “Therefore, if sufficient employees do not return to work by 5 p.m., EST, on Thursday to restore normal operations, we will be forced to immediately move to liquidate the entire Company, which will result in the loss of nearly 18,000 jobs.  It is now up to Hostess’ BCTGM represented employees and Frank Hurt, their international president, to decide if they want to call off the strike and save this Company, or cause massive financial harm to thousands of employees and their families.” ...MORE
Previously: