December 4, 2012

Hostess' failure simmered for years

The company's closure follows a decade of financial trouble and competitive complacency.

By Jessica Hall jhall@pressherald.com
Staff Writer

(Continued from page 2)

Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results

click image to enlarge

Striking workers placed a faux coffin lid outside the Hostess bakery in Biddeford after the company announced last month that it would liquidate. In hindsight, an analyst says, both the union and company would have been better off had they tried harder to reach a deal.

2012 Staff FIle Photo/Gregory Rec

It didn't work. Hostess filed for bankruptcy in January 2012 with $860 million in debt. Its net loss ballooned to $1.1 billion in fiscal 2012 on revenues of $2.5 billion. By contrast, sales in 2002 had been as high as $3.5 billion. The company also had about $110 million in unfunded pension obligations.

Hostess had been hobbled by rising commodity prices, industry consolidation by its rivals, shrinking sales due to changing habits on the part of diet- and budget-conscious consumers, as well as a lack of marketing muscle. Its unions contended it also had failed to modernize many of its factories or maintain its trucks.

After its second bankruptcy filing, lenders poured in another $75 million to keep the company afloat. Hostess again sought additional wage and benefit concessions from its unions, a tough battle considering the company had asked for concessions already in its first bankruptcy reorganization. Hostess also had stopped contributing to its union pension plans more than a year ago.

BAKERY UNIT REJECTS CONTRACT

Unions countered that Hostess had approved pay raises for its top executives, belying the company's claims of commonly shared sacrifice.

While the Teamsters eventually agreed to the concessions, which included up to 32 percent in wage and benefit reductions, the bakery union balked. In September, 92 percent of the bakery unit voted against Hostess' final contract offer.

With the bankruptcy court's blessing, Hostess imposed the cuts on its workers, prompting the Nov. 9 strike by the bakery union. A week later, the company shut its doors.

Hostess CEO Greg Rayburn has suggested that the bakery union sacrificed the workers in an effort to produce a show of force at other unionized companies. The union in turn blamed the company for mismanagement and enriching executives and owners rather than investing in the company and its brands.

"There was a game of chicken played between the unions and the private equity owners here. And likely both would have been better off by reaching a deal," Seton Hall's Lubben said.

MANAGERS TO GET BONUSES

Hostess on Thursday got approval to pay $1.8 million in bonuses to 19 managers who will oversee the dismantling of the company. The bonuses range from $7,400 to $130,500 and do not include pay for Rayburn, who was brought on as a restructuring expert earlier this year. Rayburn is being paid $125,000 a month, or $1.5 million a year.

"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," said Frank Hurt, president of the bakery union.

"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

Joshua Scherer of Perella Weinberg, who was hired by Hostess to sell its assets, told the bankrutpcy court that calls from potential bidders, including large national retailers and overseas buyers, were coming "fast and furious."

The liquidation could raise $1 billion, Scherer estimates.

Analysts say whoever buys the company would be smart to pick up snack brands such as Twinkies and Drake's, but bypass Wonder Bread.

"The snack business can be resurrected, not the bread category," Goldin said. "It's not perceived to be high quality."

Staff Writer Jessica Hall can be contacted at 791-6316 or at:

jhall@mainetoday.com


Correction: This story was revised at 2:50 p.m., Dec. 4, 2012, to give the correct spelling of Morningstar equity analyst Erin Lash's name.

Were you interviewed for this story? If so, please fill out our accuracy form

Send question/comment to the editors




Further Discussion

Here at PressHerald.com we value our readers and are committed to growing our community by encouraging you to add to the discussion. To ensure conscientious dialogue we have implemented a strict no-bullying policy. To participate, you must follow our Terms of Use.

Questions about the article? Add them below and we’ll try to answer them or do a follow-up post as soon as we can. Technical problems? Email them to us with an exact description of the problem. Make sure to include:
  • Type of computer or mobile device your are using
  • Exact operating system and browser you are viewing the site on (TIP: You can easily determine your operating system here.)


Today's poll: Hostess

Who do you think is more at fault for the Hostess bankruptcy, the union or the company’s management?

Management

Union

View Results