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Hostess to Shut Down after Crippling Strike

11/16/2012 | 07:56am US/Eastern

--Hostess to shut plants, liquidate as bakers union strike hurts operations

--Chief executive says wind-down will take months but require few workers

--Brands' fate remains uncertain

Hostess Brands Inc., the maker of the iconic Twinkie treats and traditional pantry staples such as Wonder Bread, is liquidating its 85-year-old business, putting more than 18,000 workers out of jobs just before the holidays.

A victim of changing consumer tastes, high commodity costs and, most importantly, strained labor relations, Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.

The work stoppage, launched Nov. 9 by the Bakery, Confectionery, Tobacco Workers and Grain Millers Union in protest of a fresh labor contract, affected about two-thirds of Hostess's 36 plants. The striking workers--who numbered in the thousands--were making it impossible for the Irving, Texas, company to continue producing its baked goods, Chief Executive Gregory Rayburn said.

The CEO, a restructuring professional who ascended to the top of the company after its former leader abruptly resigned earlier this year, said the wind-down will take months but require few workers.

"It's a very sad day," Mr. Rayburn said in an interview Friday afternoon. "I'm very, very disappointed and I think we've got a lot of disappointed and angry people."

A representative for the bakers union couldn't be reached to comment Friday morning, but the union's president, Frank Hurt, has called Hostess's new labor proposal "untenable."

Ken Hall, the treasurer and general secretary for Hostess's largest union, the International Brotherhood of Teamsters, drew a clear line between his group and the bakers. He stressed that the Teamsters fought Hostess in the courtroom and, after a legal victory in the spring, negotiated with the company behind closed doors, while the bakers largely remained silent in the bankruptcy case.

"We chose a different path than they did," Mr. Hall said in an interview.

The union's members ultimately narrowly voted in favor of the final labor deal Hostess offered up, fearing a fire sale of the company otherwise. "I think what we have seen in the past 24 hours is very clear proof that our advisers and our union was right," Mr. Hall said.

The union, he said, is in talks with potential buyers for certain pools of Hostess assets with the hopes that one of them might keep some operations alive and provide jobs for some of the 6,700 Teamsters workers who found themselves out of work on Friday.

Hostess's remaining inventory--loaves of bread and plastic packages of cream-filled desserts--will likely be sold in bulk to a discounter or big-box store. The company will attempt to sell its plants and its brands, "everything and anything that we can," Mr. Rayburn said in an interview Thursday afternoon, before the company had decided to shut down.

On Friday morning, Hostess, which emerged from an earlier Chapter 11 case in 2009 under the control of private equity firm Ripplewood Holdings, filed court papers seeking a bankruptcy judge's approval to launch the wind-down. It estimates the process will cost some $41.3 million in the first 13 weeks and that the liquidation of its accounts receivables and inventory will generate about $77 million in the first 10 weeks. The entire process should take about a year, Hostess said, and will be financed in part by the company's $75 million bankruptcy loan.

The company is also seeking permission to pay a group of 19 managers bonuses ranging from 25% to 75% of their annual base compensation. Those payments would total up to $1.75 million, the company said. In addition, it wants to pay 3,200 employees bonuses equal to 25% of what they will earn from Friday until their wind-down-related duties are completed. Those payments would total $4.36 million.

Hostess said that while it was unsuccessful in luring a buyer for the business as a whole, it had received some "potentially viable proposals" for certain pools of assets. It hopes that chunks of the business will continue to operate in the hands of a new buyer.

The fate of the company's ubiquitous brands remains uncertain, set to be decided by a court-supervised auction run by Hostess's investment bankers, or perhaps determined by a group of liquidators. Mr. Rayburn has said he is unsure if all of the company's brands--there are about 30--will sell or how much they might fetch.

On the one hand, the names have decades of brand equity, and there's "pretty significant demand" for the products, which bring in about $2 billion in annual revenue, Mr. Rayburn said. But a competitor would have to ramp up production for the new products and give up valuable shelf space it is already stocking with its own goods, he noted.

Brian Weddington, a senior credit officer at Moody's Investors Service Inc. who focuses on baking companies, said Hostess's shutdown could have a potential upside for competitors. The liquidation presents a "once in a half century opportunity" for Flowers Foods Inc. (FLO), for example, the maker of Tastykake snacks and Nature's Own bread.

"This could be a game changer for Flowers," he said, noting that the company, mainly focused on the Southeast and Northeast markets, could expand its reach and become a national player.

A representative for Flowers Friday declined to comment on the possibility that it could bid on some Hostess assets and called the liquidation "an unfortunate situation."

The specter of liquidation has loomed large since Hostess sought Chapter 11 protection in January for the second time. From the start, the company has warned that labor cuts were its only chance to survive in the marketplace and said the only other possible outcome was a full shutdown of the business. Both Hostess and its largest union, the Teamsters, have long agreed a widespread strike would spell the end of the company.

But Hostess has threatened liquidation before in the case--and during its last stint in Chapter 11--and not followed through. Earlier this year, it said a vote against its best and final offer by either of its two largest unions would prompt an immediate liquidation. But when the bakers union gave Hostess just that trigger, Hostess instead decided to take its case back to the court. At the time, Mr. Rayburn said he was changing course because of an unfair voting process that had been skewed by union leaders, a claim Mr. Hurt of the bakers union denied.

The company's roller coaster of a bankruptcy case nearly led it to reorganization. Months of negotiations, threats and labor trials ultimately led to new labor terms with the company's unions. The Teamsters gave their support willingly, though begrudgingly, while the bakers had the terms imposed upon them by a bankruptcy judge. The bakers bristled at the new terms, which included wage and commission cuts of 8% in the first year, and began striking on Nov. 9.

"It's just way, way over the top," Mr. Hurt said of the labor contract in an interview Monday. The proposal, which also included unpopular pension changes, garnered a near-unanimous rejection from bakers union members during a September vote. "It was an untenable proposal for our people," he said.

Mr. Rayburn earlier this week called on employees to return to work, vowing to pull the plug on the business if he couldn't get plants running again. As of Thursday morning, 13 plants were still operating below 50% capacity and three had been shut down--a sort of warning shot by the company that on Monday eliminated 627 jobs. Court papers indicate the company suffered $7.5 million to $9.5 million in losses as a result of the strike.

Mr. Rayburn blames a host of factors, from years of mismanagement to a lack of capital investment to legacy labor costs, for the demise of the company, which traces its roots to the 1927 founding of Schulze Baking Co.

"Frankly, this is a failure," he said. "It's a failure on everyone involved, including me."

Adam Hanft, a branding strategist behind Hanft Projects, sees the potential for new life in the death of a decades-old company. A new owner of the intellectual property, including brand names, recipes and graphics, could revitalize the Hostess brands. Mr. Hanft envisions new flavors, limited-edition Twinkies, products co-branded with independent music groups and the potential for an international reach.

"Its nutritional emptiness in the right hands could be its core strength," he said, explaining that a buyer that embraces the brand's "kitschy," "deliciously retro" feel could be rewarded with a hipster following. He foresees a potential diverse crowd of bidders for the property.

"It's the kind of iconic brand that might attract people who might not otherwise be interested in owning a consumer good," Mr. Hanft said.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com.)

-Write to Rachel Feintzeig at rachel.feintzeig@dowjones.com.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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