The day the Twinkie died
Hostess Brands goes out blaming unions for its demise
By DON McINTOSH
Associate Editor
Hostess Brands CEO Greg Rayburn
may have sold the business press on the
claim that unions are to blame for his
company’s end, but nothing could be
further from the truth, say leaders of
83,000-member Bakery Confectionery,
Tobacco Workers and Grain Millers In-
ternational Union (BCTGM).
“Blaming BCTGM for the liquida-
tion is no more credible than blaming
an isolated gust of wind for blowing
over a tree, when it was the tree’s shal-
low, rotted root structure that was actu-
ally responsible,” the union said in a
Nov. 19 filing in U.S. Bankruptcy
Court.
Hostess, which filed bankruptcy
Jan. 11 for the second time in a decade,
announced Nov. 16 that it is no longer
seeking to restructure but instead in-
tends to liquidate, selling off its assets,
including the right to make Wonder
Bread, Twinkies, and 28 other well-
known brands. But the company was
run into the ground by management,
not by its unions, says BCTGM Presi-
dent Frank Hurt.
In the ’80s and ’90s, Hostess bought
up numerous competitors, was itself
sold four times, and ended up heavily
in debt, but instead of paying
down that debt, the company
spent its resources buying
back stock to drive its share
price up. For decades, man-
agement stuck with its old
product line as consumer
tastes changed, and failed to
invest in new equipment.
The company added ingredi-
ents to lengthen its products
shelf-life — so that it could
close plants and cut delivery routes. But
quality suffered and sales dropped, and
gas prices rose, diminishing the savings
on products that now had to be trucked
farther. In 2002, $575 million in debt,
the company declared bankruptcy.
In bankruptcy, the company negoti-
ated two rounds of wage and benefit
concessions from its unions — princi-
pally BCTGM and the Teamsters —
totaling $107 million a year. The
unions also agreed to layoffs and plant
closures that brought the workforce
down to about 19,000 from more than
30,000.
The company emerged from bank-
ruptcy in 2009 with $774 million in
debt, under the ownership of a private
equity company and two hedge funds.
But Hurt says managers failed to use
savings from the union concessions to
turn the company around. Hostess in-
troduced no new products, continued to
skimp on reinvestment, and cut back on
advertising and marketing.
By mid-2011, the company was
again having difficulty making pay-
ments on its debt, and in August 2011,
it stopped making its required $4 mil-
lion a month in pension contributions
in violation of its union contracts.
Then late last year, in what BCTGM
later called evidence of bad faith, top
managers had the company convert
their performance bonuses into salary
guarantees — at the same time that
Hostess attorneys were preparing a sec-
ond bankruptcy filing. For Brian
Driscoll, who’d only been Hostess
CEO since June 2010, it meant a raise
from $750,000 to $2.55 million.
On Jan. 11, Hostess filed for Chap-
ter 11 bankruptcy protection, which al-
lows a company to stay in business
while it re-organizes and renegotiates
terms with lenders, vendors, and em-
ployees. And under Section 1113 of
Chapter 11, companies can reject or
modify union contracts if unions turn
down a company’s final offer and the
judge determines it’s “necessary” for
the reorganization to succeed.
In its bankruptcy filing, Hostess re-
ported 2011 sales of $2.5 billion and
losses of $341 million, and it listed $1.3
billion in debt versus $981.6 million in
assets. Without a doubt, Hostess was
drowning in debt, but instead of pro-
posing that creditors take a loss, Host-
ess told the court it would not be able to
emerge as a viable competitor unless it
was relieved of significant financial
commitments and work rules imposed
by its collective bargaining agreements.
Yet most of Hostess’ competitors
are unionized and financially healthy,
including Mexican multinational
Bimbo, which entered the U.S. bread
market in the mid-’90s. Today Bimbo
is the biggest, and is overwhelmingly
union in its baking operations, and
about half unionized in its distribution.
BCTGM leaders say Hostess ap-
peared to have no reorganization plan
in its bankruptcy filing beyond trying
to squeeze more concessions from
workers.
Meanwhile, Driscoll himself re-
signed March 9, and named as replace-
ment Rayburn, who’d been hired Feb.
22 as an expert on corporate liquida-
tions. Rayburn is founder and owner of
Kobi Partners, a restructuring advisory
firm. Hostess is paying him $125,000
a month.
After months of legal motions,
Hostess presented to workers its de-
mand for concessions. Teamsters ap-
proved Hostess-proposed concessions
by a narrow 53 percent vote, but
BCTGM members rejected them by an
overwhelming 92 percent.
The offer BCTGM members re-
jected would have terminated their pen-
sion plan, doubled their health insur-
ance premiums while worsening plan
benefits, eliminated the eight-hour day,
and reduced their hourly pay by 27 per-
cent over five years, starting with an 8
percent cut in the first year. Under
Hostess’ proposal, a worker who began
the contract at $16.12 an hour would
earn $11.26 five years later. And on top
of all that, workers were being asked to
agree to the closure of 10 to 12 addi-
tional plants, without being told which
ones would be closed.
In a Sept. 17 press statement after
the vote, BCTGM President Hurt
called it “an outrageously unfair pro-
posal from a company that has de-
stroyed the trust of its workers through
years of mismanagement, greed and
unfulfilled promises.”
With its bakers refusing to agree to
those terms, Hostess asked U.S. Bank-
ruptcy Court Judge Robert Drain for
permission to impose them anyway. It’s
becoming increasingly common for
bankruptcy judges to rip up labor con-
tracts that were negotiated over
decades. Hostess had other contracts,
for example with Cargill to purchase
flour, sweeteners and wheat gluten.
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