Nov. 20 (Bloomberg) -- The judge overseeing Hostess Brands Inc., while declining to approve the company’s liquidation, asked management and the bakers’ union to enter mediation today to resolve the strike that the maker of Twinkies and Wonder bread said forced it to shut.
U.S. Bankruptcy Judge Robert Drain said yesterday at a hearing in White Plains, New York, that there are “serious questions as to the logic behind the decision to strike.” Hostess and the bakers’ union agreed to Drain’s request to enter confidential mediation under his supervision.
“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,” Drain said. “My desire to do this is prompted primarily by the potential loss of over 18,000 jobs, as well as my belief that there is a possibility to resolve this matter, notwithstanding the losses the debtors have incurred over the last week or so.”
Hostess hasn’t spoken with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union since August, said Heather Lennox, a lawyer for the company. 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. Any agreement arising from the mediation would probably come too late to save the company, Lennox said.
“Things have gone too far to repair themselves under the current form,” Lennox, a partner at Jones Day, told Drain. “It would be very hard for us to recover from this damage even if there were to be an agreement in the near term.”
“Our best shot is to see what we can sell as going concerns and have the company continue that way,” she said. The hearing to consider Hostess’s request to wind down was postponed until Nov. 21.
Hostess said Nov. 16 that it would shut, 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 yesterday, Hostess’s lawyers said.
Corrina Christensen, a spokeswoman for the bakers’ union, didn’t immediately respond to an e-mail seeking comment on the mediation.
The International Brotherhood of Teamsters, whose members distribute Hostess products, had ratified a new contract with 8 percent in wage concessions and 17 percent in benefit reductions.
“The Teamsters will closely monitor the mediation between the BCTGM and Hostess management and assist in any way we can to help the two sides reach an agreement that keeps the company’s doors open,” Ken Hall, the Teamsters general secretary-treasurer, said yesterday in a statement.
The judge may be creating risk for both sides that encourages them to reach a deal, Ken Russak, a bankruptcy attorney at Frandzel Robins Bloom & Csato in Los Angeles, said yesterday in an interview. “The bankruptcy judge would much prefer to have the parties work something out than having to make a decision in this highly charged environment,” Russak 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 an expensive way.”
Tom Becker, a spokesman for Hostess, didn’t immediately respond to voice-mail and e-mail messages seeking comment on the mediation.
The U.S. trustee, a Justice Department official responsible for protecting creditors, yesterday asked Drain to take control of the liquidation 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 36 bakeries, 242 depots, 216 retail stores, and 311 hybrid depot-store facilities, according to court filings. The company has 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 buy 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. Keith Hancock, a spokesman for Thomasville, Georgia-based Flowers, didn’t say whether it would bid.
While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer 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, 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 company has plants in 22 states, stretching from Alaska to New Jersey.
Ding Dongs, Ho Hos
The 82-year-old maker of Hostess CupCakes, Ding Dongs and Ho Hos has endured years of declining sales as Americans turned to rivals’ snacks and breads, while ingredient costs and labor expenses climbed.
Hostess said it was pushed toward liquidation when the bakers’ 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.
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.”
Hostess sought court protection in January, its second time in bankruptcy, listing assets of $982 million and debt of $1.43 billion.
The case is In re Hostess Brands Inc., 12-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains).
To contact the reporter on this story: Dawn McCarty in Wilmington at email@example.com