All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearian tragedy than talk show banter. It's a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.
The Hostess name dates to the 1920s, when the Continental Baking Co. in New York City sold "Wonder" bread goods and "Hostess" cake products. Through a series of mergers, Continental became the largest commercial bakery in the U.S. Then the company was bought and sold numerous times with many mergers and acquisitions along the way finally ending up as the Interstate Bakeries Corporation. Hostess has been sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands' union workers agreed to pay cuts and made contract concessions in exchange for equity.
The difference between a private equity fund and a hedge fund is that a private equity fund takes full or partial ownership of the company using money borrowed by the company that they take over. They used to be called leveraged buyout firms or LBOs. What they end up with is called an "equity stake." A hedge fund just makes strategic bets in the markets hoping to get a huge return. In this case the money they invested in Hostess Brands would either pay off in huge returns if the company stayed in business or potentially even greater returns if the company went bankrupt and its assets were sold off. In that case the hedge funds would be first in line to recoup their investment.
There were two unions involved: the Teamsters who delivered the products to stores and the Bakery, Confectionery, Tobacco Workers and Grain Millers' International Union who actually made the products. There are around 18,000 unionized workers in all employed by Hostess.
Here's where the plot thickens. The Bain Capital playbook calls for private equity companies like Bain to acquire ownership of a company, take out huge loans in the company's name, pay its executives huge dividends and management fees, lay off unionized workers and then either sell the company or take it into bankruptcy and sell off the assets making millions more. In the case of Hostess Brands the main assets are the brand names Twinkies, Ho Hos, Wonder Bread, Zingers, Ding Dongs etc all with established markets. In Naomi Klein's book, "No Logo," she points out that in today's marketplace it is only the brand names that count. Manufacturing is passe and is contracted out to other companies, those companies in particular that produce the goods for the least contract price mainly in Asian sweatshops. Hostess was a "legacy" company in the sense that its workers were unionized, worked directly for Hostess and had decent wages and benefits. Like most private equity firms Ripplewood's covert plan was to cut costs by getting rid of unionized workers. Then it could capitalize on Hostess Brands most valuable asset, the brand names of the products themselves.
The general idea with reference to Tommy Hilfiger brands is as follows (from "No Logo" by Naomi Klein):
"Tommy Hilfiger, meanwhile, is less in the business of manufacturing clothes than he is in the business of signing his name. The company is run entirely through licensing agreements, with Hilfiger commissioning all its products from a group of other companies: Jockey International makes Hilfiger underwear, Pepe Jeans London makes Hilfiger jeans, Oxford Industries make Tommy shirts, the Stride Rite Corporation makes its footwear. What does Tommy Hilfiger manufacture? Nothing at all."
So by signing all his clothes with the Tommy Hilfiger brand while manufacturing nothing, Tommy Hilfiger has managed to turn his faithful adherents into walking, talking life-sized billboards. All the value is in the brand rather than in the products themselves. Similarly Nike, the Gap, Ralph Lauren, Calvin Klein, Liz Claiborne and others operate in the same way.
It's not a stretch to imagine that the main assets of Hostess Brands are the very names of its products, Twinkies, for example. And in a liquidation these could command millions of dollars. The products themselves could be manufactured anywhere and shipped to the US if necessary. Since they are all loaded with preservatives, spoilage is not a problem.
But first Hostess Brands management had to go through the charade of getting rid of its unionized workers. On January 10, 2012, Hostess Brands filed for Chapter 11 bankruptcy for the second time, but management said that it would continue to operate with $75 million debtor-in-possession financing from Monarch Alternative Capital, Silver Point Capital and other investors.The company stopped paying future pension benefits after August, thereby breaking its union contracts. As already mentioned, workers had given up a lot in the 2004 bankruptcy. When management demanded even more concessions and the bankruptcy judge gave Hostess permission to force the bakers' union to accept a new five-year labor contract that featured an 8% wage cut in the first year, new pension plan restrictions and a 17% increase in health care costs for employees, the workers struck in November 2012. While it wanted to cut worker wages and benefits again it came out that Hostess Brands’ management had given themselves several raises in the previous year, all the while complaining that the workers were grossly overpaid relative to the company’s increasingly dismal financial position. Fortune reported that unions had been unhappy with CEO Driscoll's proposed compensation package of $1.5 million, plus cash incentives and a $1.95 million "long term compensation" package.
The Teamsters union managed to come to an agreement with Hostess management, but the Bakery, Confectionery, Tobacco Workers and Grain Millers' International Union (BCTGM) went on strike after the latest contract proposal from Hostess Brands was rejected by 92 percent of its members. The Teamsters agreed not to cross picket lines.
On November 16, 2012, Hostess announced that it was ceasing plant operations and laying off most of its 18,500 employees. It stated that it intended to sell off all of its assets, including the well known brand names, and liquidate. The new CEO, Gregory Rayburn, stated, "Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders." Of course, this is what Hostess wanted to do all along, at least some of its principles. In an ironic twist of fate, private equity Ripplewood Holdings which, according to the Bain Capital playbook, should have profited from selling off Hostess Brands assets had screwed up and had cut a deal with Monarch Alternative Capital and Silver Point Capital that, in return for its infusion of cash after the latest bankruptcy and the resultant debt that those hedge funds owned, they would be the first to be paid in the event of a bankruptcy and a liquidation. It is called "secured debt" as opposed to "unsecured debt." As it turned out there was a hierarchy of creditors with these two companies standing at the top of the pyramid. So lucrative was the deal they had struck with Hostess that, when they walk away with their millions after the assets are sold off, there will be little left for anyone else including private equity firm Ripplewood Holdings. Monarch and Silverpoint will come away smelling like roses while everyone else including the workers will get screwed.
After a mediation charade, the bankruptcy court judge went ahead and gave Hostess Brands most recent CEO, Gregory Rayburn, permission to close on November 21, 2012 leaving workers with a massively underfunded pension plan, an unhappy Thanksgiving and the prospect of a bleak Christmas.
The BTCGM released the following statement:
“Hostess’s announcement that it is liquidating the company is a deep disappointment for all of our Hostess members. While Hostess management wants to blame our members for the demise of the company, the truth is that 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.
“Hostess failed because its six management teams over the last eight years were unable to make it a profitable, successful business enterprise. Despite a commitment from the company after the first bankruptcy that the resources derived from the workers’ concessions would be plowed back into the company, this never materialized. Management refused to invest in modernizing its bakeries or devote necessary resources to advertising and marketing, product development and new technology. Business plan after business plan failed, leaving the company ever deeper in debt.
“When a highly-respected financial consultant, hired by Hostess, determined earlier this year that the company’s business plan to exit bankruptcy was guaranteed to fail because it left the company with unsustainable debt levels, our members knew that the massive wage and benefit concessions the company was demanding would go straight to Wall Street investors and not back into the company.
“Our members were aware that while the company was descending into bankruptcy and demanding deep concessions, the top ten executives of the company were rewarding themselves with lavish compensation increases, with the then CEO receiving a 300 percent increase.
“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years. They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and “restructuring specialists” walk away with untold millions of dollars.
“Throughout this long and difficult process, BCTGM members showed tremendous courage, solidarity and devotion to principle. They were well aware of the potential consequences of their actions but stood strong for dignity, justice and respect.”