Hope for Hostess? Judge pushes sides into mediation

Hostess Brands Inc. will hold talks with its bakery workers’ union on Tuesday to explore the reasons for a strike that the maker of Twinkies and Wonder bread said will force it to liquidate.

U.S Bankruptcy Judge Robert Drain said Monday at a hearing in White Plains, N.Y., that there are “serious questions as to the logic behind the decision to strike.” He urged the company and the union to enter mediation, citing the potential loss of more than 18,000 jobs, including more than 850 workers in Indiana and almost 300 in Indianapolis.

The two sides agreed to the mediation, which will begin in Drain's court Tuesday afternoon.

“I believe that mediation really only works if the parties are willing to do it but I’m also strongly suggesting that the parties should be willing to do it,” Drain told lawyers for the company and its bakers’ union. “To me not to have gone through that step leaves a huge question mark over this case which I think will only be answered in litigation.”

Hostess hasn’t spoken with the union since August, a company lawyer said. Hostess is seeking permission from Drain to pay bonuses to key managers while closing operations that will leave most of its 18,500 workers unemployed as its begins a liquidation that may attract bids from private-equity firms and rivals.

Hostess said Nov. 16 that it would shut down, claiming that a weeklong strike by the bakers’ union forced liquidation. The union blamed management’s concession demands, while some employees blamed both sides. Strikers were still outside the company’s facilities Monday, Hostess’s lawyers said.

Drain said courts have established that the law doesn’t prevent monetary claims against a union for a strike that’s unlawful or improper. Discovery may bring out what was said to Hostess’s competitors and prospective buyers, he said.

“A decision in essence to accept the termination of 6,000 jobs and what appears to me the inevitable reduction of recoveries at least raises issues as to why it was made, particularly when there was no attempt made to contest the terms that were imposed,” Drain said.

“I’m giving the union as well as the debtors and their lenders a last chance to try and work those issues out in private,” the judge said. “If they don’t take it, it’s not as if they won’t be worked out. They will be worked out but they will be worked out in public and I believe ultimately in a expensive way.”

Tom Becker, a spokesman for Hostess, didn’t immediately return voice and e-mail messages seeking comment on the mediation.

The U.S. trustee, a Justice Department official responsible for protecting creditors, on Monday asked Drain to take control of the liquidation away from the company. U.S. Trustee Tracy Hope Davis asked the judge to convert the case to a Chapter 7 from Chapter 11 bankruptcy, based partly on the company’s intent to pay bonuses, and appoint a trustee to supervise the wind-down.

Hostess officials “have not demonstrated that the insider bonuses are permissible,” Davis wrote in a court filing. They also “improperly seek to exculpate and indemnify their management from past and future liabilities” and want to “cherry-pick which administrative claims get paid.”

In seeking court permission for its demise, Hostess said it wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation. Hostess is asking the judge to approve its plan to shut down 36 bakeries, 242 depots, 216 retail stores, and 311 hybrid depot-store facilities, according to court filings. There are 58 other leased or owned sites used for storage, warehousing of products or parking.

The process requires “intensive” planning, staffing and funding, the company said. A fire-sale liquidation would damage equipment and result in improper disposal of waste materials.

It’s “not a simple matter of turning off the lights and shutting the doors,” Hostess said in court papers.

The baker estimated that shutting the plants will cost $17.6 million in the next three months. The plants have about $29 million worth of excess product ingredients, Hostess said.

About $6.9 million will be spent to close depots, while $8.8 million will be used to idle retail stores and $8.1 million will go to shutting corporate offices, according to a court filing. Perishable baked goods at retail stores will be sold at going-out-of-business sales, donated to charity or destroyed, Hostess said.

Potential bidder C. Dean Metropoulos & Co., owner of Pabst Brewing Co., said it may seek to purchase Hostess’s “iconic brands,” which include Dolly Madison, Drake’s, Merita and Butternut.

Flowers Foods Inc., maker of Nature’s Own bread and Tastykake snacks, also may pursue some of its rival’s assets, wrote William Chappell, an analyst with SunTrust Robinson Humphrey, in a note to investors last week.

Flowers is “one of the most eligible acquirers” of Hostess assets and brands, Amit Sharma, an analyst at BMO Capital Markets Corp. in New York, said in a separate note, citing Flowers’ management, acquisitions and “relatively small” overlap with Hostess’s major markets and products. Keith Hancock, a spokesman for Thomasville, Ga.-based Flowers, didn’t say whether it would bid.

Metropoulos, which paid $250 million for Pabst in 2010, said it looked forward to participating in the bidding. Daren Metropoulos, a principal of the Greenwich, Conn.-based private-equity firm, said of Hostess in a Nov. 16 e-mail that “shedding the complications of the unions and old plants makes it even more attractive.”

While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, CEO Gregory F. Rayburn said last week.

“We will try to get what we can from the assets,” Rayburn told Bloomberg Television. “It’s an over-capacity industry, though, so that’s going to be a difficult prospect.”

Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said.

Hostess, based in Irving, Texas, said in court papers the liquidation will take about a year and about 3,200 workers will be retained to clean bakeries and mothball equipment. The plants are in 22 states, stretching from Alaska to New Jersey.

The 82-year-old maker of Hostess CupCakes, Ding Dongs and Ho Hos has endured years of declining sales as Americans turned to rival snacks and breads, while ingredient costs and labor expenses climbed.

Hostess said it was pushed toward liquidation when the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike Nov. 9 after Drain imposed contract concessions opposed by 92 percent of the union’s members. The union represents about 5,000 Hostess workers.

Hostess closed three plants permanently Nov. 12, blaming the strike, and warned that the company would liquidate unless enough employees returned to work to resume normal operations.

Sally Greenberg, executive director of the Washington-based National Consumers League, accused Hostess executives in a statement of “scapegoating” the union, “rather than take responsibility themselves.”

Bakers’ international union President Frank Hurt said Nov. 16 that the liquidation is a “deep disappointment for all of our Hostess members.” If they hadn’t accepted concessions earlier, “this company would have gone out of business long ago. Our members decided they were not going to take any more abuse.”

The International Brotherhood of Teamsters, representing about 6,700 Hostess employees, had urged the bakers’ union to let members decide by secret ballot whether to continue the walkout. Drivers represented by the Teamsters earlier ratified a new contract with 8 percent in wage concessions and 17 percent in benefit reductions.

“The company has clearly been mismanaged for some time,” the Teamsters said in a statement. “Unfortunately, the company’s operating and financial problems were so severe that it required steep concessions from a variety of stakeholders but not all stakeholders were willing to be constructive.”

Hostess sought court protection in January, its second time in bankruptcy, listing assets of $982 million and debt of $1.43 billion. The Teamsters and the bakery workers’ union made voluntary concessions in the first Chapter 11 reorganization, which began in 2004.