Twinkies May Vanish as Union’s Brinkmanship Shuts Hostess

Misty Williams and other Hostess Brands Inc. workers arriving at the plant in Wayne, New Jersey, yesterday found a sign on the doors: “Hostess Brands Has Closed All Locations.”

Williams, who’s 40 and has worked at the company for 14 years, was shocked that management and union leaders had let their dispute get to the point that the 82-year-old maker of Twinkies and Ding Dongs would close its 36 plants, fire more than 18,000 employees and liquidate assets.

“They were just too stubborn, I guess, the union and management,” she said.

Hostess and its collection of iconic brands failed after years of management shakeups and missteps, high labor and commodity costs and the changing appetites of consumers as they look for more healthy snacks. In the end, the bakers union miscalculated: It stopped talking to management a month ago, betting a strike would pressure executives back to the negotiating table. Instead, the company, in bankruptcy and struggling for cash, opted to close its doors to salvage whatever value it could for lenders.

While the company is liquidating, its brands may yet live on as bidders for Hostess assets, including those brands, emerge ahead of a bankruptcy court hearing next week.

“It’s the bakers’ union that hasn’t done its homework,” said Steve Cabot, chairman of the Cabot Institute for Labor Relations, a consulting firm in Palm Coast, Florida. “They want to play brinkmanship. This time, they lost.”

Management Ultimatum

The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union had gone on strike Nov. 9 and disrupted production and deliveries, ignoring a management ultimatum to return to work by 5 p.m. Nov. 15. The bosses weren’t bluffing -- they halted production and sought liquidation, warning that brands and their recipes may be snapped up by bargain-seeking corporations, but workers and many antiquated plants wouldn’t be.

The strike starved Hostess of some of the almost $50 million in weekly sales it was reliant on to make it through bankruptcy, as baking ceased in most picketed plants, said a person familiar with the matter who asked not to be identified because the details weren’t public.

Management and its advisers calculated a shutdown was necessary should the strike exceed a week, to preserve enough cash for an orderly liquidation.

No Margin

“Companies in bankruptcy don’t have any margin for error,” Hostess Chief Executive Officer Gregory F. Rayburn said in an interview. “We couldn’t sustain that loss of sales to the business. We had lenders who were willing to fund an exit if we could get the union concessions through, but they’re not willing to fill” the sales gap caused by the strike, “and I don’t blame them.”

Bakery union President Frank Hurt, who represents 5,600 workers, blamed management, saying in a statement that it “refused to invest in modernizing its bakeries or devote necessary resources to advertising and marketing, product development and new technology,” since its earlier bankruptcy.

“Had it not been for the valiant efforts of our members over the last eight years, including accepting significant wage and benefit concessions after the first bankruptcy, this company would have gone out of business long ago,” Hurt said.

Ding Dongs, Ho Hos

Supplies of Wonder bread, Hostess CupCakes, Ding Dongs and Ho Hos will run out along with Twinkies, as 6,700 delivery workers represented by the International Brotherhood of Teamsters distribute the last of the snacks and lose their jobs too. The Teamsters, who had ratified a new contract with 8 percent in wage concessions and 17 percent in benefit reductions, was critical of the bakers union.

“Teamster Hostess members, based on the facts and advice from respected restructuring advisers, understood what was at stake and voted to protect all jobs at Hostess,” General Secretary-Treasurer Ken Hall said in a statement yesterday. “The timing of the closure could not be worse as we enter the holiday season.”

Hostess emerged from its first bankruptcy in 2009 as a private company controlled by buyout firm Ripplewood Holdings LLC and lenders. The company was previously known as Interstate Bakeries Corp. It entered its latest bankruptcy in January.

In the immediate standoff, Rayburn said that the bakers’ union misled its members by telling them that a white knight buyer existed to save Hostess and their contracts. There was “never” a buyer for the whole company, Rayburn said.

Bargaining Table

Some picketers were convinced by the union that after 13 months of negotiations Hostess would return to the bargaining table, said the person familiar with the matter and another who also didn’t want to be named because the details weren’t public. Yet union leadership had resisted proposing alternative terms and turned up at fewer meetings as talks continued before finally disengaging altogether, the people said.

“They stopped returning our calls a month ago,” Rayburn said.

In contrast, the Teamsters negotiated actively and countered with its own proposals from July 2011 until an agreement was reached in August 2012, the people said. A year ago, the bakers union rejected an offer to bargain with the Teamsters.

Ten other unions representing about 1,000 workers among them either reached deals or didn’t challenge the court-ordered contract concessions, according to a list obtained by Bloomberg News.

Union’s Message

Rayburn said the union “pretty much didn’t care about the loss of these jobs. I think they wanted to send a message to other companies they shouldn’t come looking for these kinds of concessions.”

Bakery union members make products for food producers including PepsiCo Inc., General Mills Inc., Kellogg Co. and Nestle SA.

“This is a tragic ending for Hostess and its nearly 19,000 employees,” said Harry Wilson, whose firm Maeva Group advised on the restructuring. “Unfortunately, the BCT’s leader, acting with inadequate information and bad judgment, refused to engage in the restructuring process.”

The bakers union has struck at least twice at other employers since 2000. That year the union claimed a victory at Earthgrains Co., then the second-largest maker of packaged bread in the U.S., following a monthlong strike by almost 4,000 workers. The union eventually obtained wage and benefit increases of 3.9 percent over a three-year term, sending employees at plants in 13 states, including Alabama, Georgia and Texas, back to work. Earthgrains became part of Sara Lee Corp. through a $2.8 billion acquisition, including debt, the next year.

Hershey Strike

In 2002 the union engineered a six-week strike by workers at Hershey, the longest in the candy maker’s century-old history. At the center of the dispute was the company’s demand that employees pay more of health insurance premiums. The settlement kept the employees’ share of premiums the same in exchange for smaller pay raises.

The union’s origins date back to 1886, when the Bakery and Confectionery Workers International Union was formed. The group combined with other unions, including the Tobacco Workers International Union of America and the American Federation of Grain Millers, over the next century, adopting its current incarnation in 1999.

When Hostess filed for bankruptcy this year, it listed assets of $982 million and liabilities of $1.43 billion.

$2.5 Billion Claims

In May and again in October, a bankruptcy judge in White Plains, New York, authorized Hostess to impose concessions on some union workers. Salary and benefits were cut Oct. 21, and by Nov. 7, some bakery union locals started sending strike notices. Within two days, the bakery union struck 12 plants and set up picket lines at 12 others. Hostess closed three plants permanently on Nov. 12.

Whether Hostess would have survived without the strike will never be known. The company filed a proposed reorganization plan in October telling unsecured creditors with more than $2.5 billion in claims they would get nothing.

The plan called for issuing almost $700 million in new secured debt, most of it paying interest with extra debt. To win creditor and court approval of the plan, Hostess needed to sell assets to raise $88 million cash plus enough to pay off the amount outstanding under the $75 million loan financing the reorganization.

“This is the second company I worked at that closed, so I’m very sad,” said Nelson Otalbaro, 49, a sanitation worker at the Hostess Wayne plant. “Everyone paying for a wedding, and a house, they were hoping maybe they could make a deal.”

The case is In re Hostess Brands Inc., 12-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains). The prior bankruptcy was In re Interstate Bakeries Corp., 04-45814, U.S. Bankruptcy Court, Western District of Missouri (Kansas City).

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