The Smart Money: The fall of the Twinkie

Posted Wednesday, November 21, 2012 in Analysis

The Smart Money: The fall of the Twinkie

by Gina Hamilton

Friday saw the demise of what amounts to an American institution: the Hostess bakery, which was famous for its Wonder Bread, Ho Hos, CupCakes, and yes, Twinkies. 

Hostess has a bakery in Biddeford, where 300 people lost their jobs the week before the holiday season began, after the bakers' union, together with other unions, went out on strike on Nov. 9. Although the company reached agreements with the Teamsters, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union refused to accept any additional wage cuts or benefit cuts, and the company said it was "forced" into liquidation last Friday.

But what is the real story here? Is this a story of a greedy union not meeting its capital partner halfway, and in so doing, putting many people out of work?

No, not really. 

Let's look at what really happened to Hostess and its original parent company, Continental Baking. 

First, American tastes and nutritional concerns began to change. Remember when kids brought snack cakes to school for snacks and lunches? Schools began to frown on that practice as early as the 1990s in many parts of the country, and eventually banned the sweet treats in favor of fresh fruit, vegetables, cheese, and healthier snacks for kids.  By 2001, when the Twinkie turned 70 years old, parents were turning from the chemically laden sugar snacks to healthier fare. Wonder Bread, the other mainstay of Hostess Brands, was similarly being villified in the media and in schools, and parents were asked to send their kid's peanut butter sandwich on whole grain bread if possible. Soon, even  peanut butter would exit American schools.

Continental Baking had been purchased by Ralston-Purina (yes, the dog-food company), in 1984, and even then it wasn't doing too well, so Purina spun it off in 1995 to a company called Interstate Bakeries. Interstate got into hot water with the federal government in 1999 under an anti-trust agreement. Wonder Bread, it seems, was supposed to be made by a company called Webers, which belonged to Interstate's largest competitor, Grupo Bimbo, a Mexican company with a strong American arm, too. They already made Entenmann's cakes and doughnuts, Sun-Maid Raisin Bread, and Thomas' English Muffins, among other things. (Incidentally, they'll likely be the saviors of Hostess Brands, too.)

So no one was really surprised when Interstate (along with Hostess) entered bankruptcy in 2004, ostensibly to reorganize. The company stayed in bankruptcy an inordinately long time ... five years ... and emerged as a private company. It changed its name to Hostess Brands, won deep concessions from its unions (cuts of 8 percent in wages and 32 percent in benefits), and got a lot of capital from its new investors, including Ripplewood Holdings, a private equity firm based in New York.

According to Fortune Magazine, “Hostess was able to exit bankruptcy in 2009 for three reasons.”

The first was Ripplewood’s equity infusion of $130 million in return for control of the company (it currently owns about two-thirds of the equity). The second reason: substantial concessions by the two big unions. Annual labor cost savings to the company were about $110 million; thousands of union members lost their jobs. The third reason: Lenders agreed to stay in the game rather than drive Hostess into liquidation and take whatever pieces were left. The key lenders were Silver Point and Monarch. Both are hedge funds that specialize in investing in distressed companies — whether you call them saviors or vultures depends on whether you’re getting fed or getting eaten. 

And then, the Great Recession hit in 2009. Consumer spending fell, the cost of ingredients ... flour, sugar, corn products ... rose. Hostess' market share fell 11 percent from 2008 to 2011. 

In August of 2011, Hostess Brands saved $100 million by "temporarily" failing to contribute to its employee pension fund. This angered the unions. 

Then, in January of 2012, the company filed for bankruptcy again, but petitioned the bankruptcy court to allow it to grant its CEO a base salary of $1.5 million per year, and a guaranteed severance package of $1.95 million per year as long as he honored a non-compete clause. The unions went ballistic. Ultimately, that CEO left, and another, Greg Rayburn, hired as a consultant only nine days earlier to help with the reorganization, was hired as the sixth CEO in 10 years. Four executives had received pay increases of 80 percent after the reorganization began. And then Rayburn tried to get out of the company's pension obligations once and for all. According to court documents:

Hostess contributions to multi-employer pension plans would cease until 2015, at which point the current required level of funding would plummet from $100 million to $25 million.

Inexplicably, the Teamsters agreed to this, but the bakers' union did not.

The company's largest liability is to its pension plans, nearly a billion dollars, which, if not satisfied by the liquidation, will become all of our problems. The U.S. government is the payor of last resort for pension funds.

Not surprisingly, the only people "made whole" by the bankruptcy have been the lawyers and other professionals who skimmed $330 million during the bankruptcy. 

On Monday, the federal bankruptcy court hearing the case ordered Hostess to mediation with the striking union as a last-ditch effort to keep the doors open.

Grupo Bimbo, the unfortunately named Mexican firm, seems poised to purchase the equipment and reopen shop should mediation fail, but no one is certain how many factories will be reopened, or where. It is possible that Maine's bakers will have jobs in the new year and begin making those sweet little treats again.

But the story of the fall of the Twinkie should stand as a cautionary tale. There is more to this story than the age-old struggle between capital and labor. This is a story of greed, all right ... but not that of a little group of bakers in Biddeford.

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