You’re probably familiar with rumors that Hostess’ iconic snack cake defies any mortal expectations of shelf life or aging. However, like the meme of how a post-nuclear-apocalyptic world would be left to cockroaches feeding on hefty supplies of Twinkies, estimates as to the longevity of Hostess’ popular brand proved wrong in the end. With Hostess Brands, Inc. nearing 11 months in bankruptcy, what started as a restructuring plan intended to reduce operating expenses and make the company viable has become a wind-down that will take plants and bakeries dark, shutter operations and carve the company up for sale in pieces to the highest bidders.

Contrary to what is being said on Facebook and other social media channels, this isn’t a story of greedy management gone unchecked. Also contrary to some that is being written by my colleagues, this isn’t a story of unions run amok (and, for the record, I don’t buy that). Management wanted a win; so did the unions. In the end, this is a story of how given common facts and circumstances, parties can define their realities in fundamentally different ways. Twinkie the Kid: Born 1947 - Died Christmas 2012. Ho-Ho-Hostess.

Hostess Brands entered chapter 11 on January 11, 2012 (1.) with $1.4 billion of debt, and $479 million in cumulative operating losses in the two years since they emerged from their previous chapter 11 case (2.). The 2012 case was filed to effect a turnaround plan, the central tenant of which was rebooting the terms of the debtor’s relationships with its unions to allow for reduction of costs associated with the 372 collective bargaining agreements to which Hostess was a party. The plan was also meant to remove obstacles to modifying operations in order to respond to market changes and customer preferences.

Among the terms of CBAs that the debtors sought to change were what the debtors termed “archaic” work rules; other rules that prevented the company from meeting potential customer delivery requirements, and mandated the use of short-run routes that could be served by more efficient, long-haul routes using newly developed product technologies which would provide a more durable product with a longer shelf-life to withstand transportation from bakery to customer, thereby reducing costs.

The Hostess order cycle was based on the local customer routes and relationships through Route Sales Representatives (reps). A rep would visit a customer and enter an order in a hand-held device, which would transmit the order to the company’s planning system. Orders would be consolidated and a baking schedule would be built for each product ordered. As this process occurred, the company’s operations systems built a shipping schedule that provided for space and cost efficiency. Once these two processes ran and determined what needed to be baked and when, and how it would be shipped to the customer, the production and delivery schedules were finalized. This process took less than 24 hours.

Once products were baked, they would be consolidated at a warehouse and forwarded to the depot to which the rep was assigned, and the rep would deliver and stock the product to the ordering customer. This happened for 175,000 customers per week. This process had been in place long before the chapter 11 case was filed. To change any part of a process that was the product of 19,000 employees, 82% of whom were subject to collective bargaining agreements and more than 14,000 of whom belonged either to the International Brotherhood of Teamsters (Teamsters) or the Bakers, Confectionery, Tobacco Workers & Grain Millers International Union (BCT), the debtors were going to have to change their collective bargaining agreements.

True to their word, on January 25, the company filed motions seeking to modify collective bargaining agreements and to modify retiree benefit obligations (by limiting the debtors’ ongoing obligations to the multi-employer pension plans) pursuant to sections 1113(c) and 1114(g) of the Bankruptcy Code (3.). Subsequent to the filing of the motions, the company engaged in negotiations with the Teamsters, but ultimately was unable to reach an agreement on terms. According to the debtors, BCT declined to negotiate with the company.

In May 2012, not only did many of the collective bargaining agreements between the company and the BCT locals expire according to their own terms, but the Court entered an order authorizing Hostess to reject and modify the BCT (4.) bargaining agreements. The Court denied the company’s motion to reject the Teamsters agreements but indicated that some of the relief sought by Hostess with respect to the Teamsters contracts would be granted, provided the debtor made changes to the relief it requested. As the company and the Teamsters dug in during negotiations as to how the debtors would deal with participation in the numerous Teamster multiemployer pension plans, Hostess’ outside investor who had been funding the company called off the game – it would no longer invest in the company, leaving the debtors without future funding.

In response to this wake-up call, Hostess and its lenders invited the Teamsters and BCT to negotiations to try and resolve these issues, and to allow the company to emerge from bankruptcy intact. The Teamsters agreed – the BCT declined to resume discussions until the Teamsters’ discussions were concluded. Four months after the start of negotiations, with what the company termed its “last, best and final offer” on the table, the Teamsters approved the modifications in early September 2012. In August 2012, three months after negotiations with the Teamsters started, Hostess presented the BCT with what it termed the functional equivalent of the same “last, best and final offer” presented to the Teamsters. By the same date on which the Teamsters approved the modifications, the BCT overwhelmingly rejected it. Only three locals voted to approve Hostess’ offered modifications.

With the Teamsters approving the modified terms and the BCT rejecting them, the company found itself asking the Court to impose the modifications upon the BCT. Based on the motions filed and the testimony provided, there was a fundamental difference of opinion between the union and the company as to what options were available to the company – the union appeared to believe that there was an angel, waiting in the wings, ready to purchase the company and relieve the rank-and-file of this burdensome management. In the union’s response to the debtor’s motion, they state, “Contrary to the Debtors’ steadfast denials, there are persons and entities that have been following this bankruptcy who continue to manifest an interest in investing in the Company or purchasing it or some or all of its assets - and the Debtors, their financial advisors and the secured lenders know who they are” (5.) [emphasis in the original]. The debtors insisted that no such purchaser existed. In retrospect, perhaps the union couldn’t have been more wrong on that count.

In early October 2012, the Court entered an order allowing the company to reject the BCT agreements and implement the modifications requested and, with respect to the agreements in place with 18 locals that had rejected the modification terms, to implement the modifications pending such time as the company and those unions had “bargained to impasse” as that term applies to the National Labor Relations Act. Throughout the remaining weeks and days of October 2012, the company modified the collective bargaining agreements of all of its remaining unions either with consent of the union members or by Court order. Peace in our time, it wasn’t.

Between November 9 and November 13, BCT locals struck or established picket lines at 24 of the company’s 36 bakeries, disrupting or ceasing operations at two-thirds of the company’s production facilities. Recalling the discussion earlier in this article concerning the company’s order cycle, disruption in two-thirds of the company’s production facilities impacted some or all of the 175,000 customers per week that the company served. To determine the gravity of a strike on Hostess at this time, a brief discussion of the company’s financial operations is useful. According to the debtors’ Monthly Operating Report filed with the Bankruptcy Court for the period ending September 22 (6.) (which was filed on October 26 – so the BCT would have had access to this information before striking), the company had approximately $37.2 million in cash and had borrowed $7.5 million from their DIP credit facility that month – more than 10% of the total available balance. What the union may not have known, unless they had asked the debtors, is that in the one-month period ending October 20 (the as-then unreported results immediately before the decision to strike), the available balance on the DIP facility was cut in half as the Debtor had to borrow more than $28 million to meet expenses (7.). A cursory glance would have confirmed that the company wasn’t taking enough cash in to meet expenses and was rapidly running out of available financing. A strike that disrupted cash flow to a company living hand-to-mouth could not have come at a worse time for the viability of the business.

The rest was Thanksgiving dinner table conversation for … well… people like us. On November 16, Hostess filed an emergency motion (8.) with the Court seeking permission to wind the company down and sell off the assets because of a lack of funding and a lack of options for continued survival in the face of the work stoppage and the idling of plants and, therefore, cash flow. The BCT, recognizing that they had come as far as they ever would with existing ownership, agreed that a sale of the company was in the cards – but the union still seemed to think that there was an ongoing and robust sale process with interested purchasers about which the debtors were keeping – and I quote – “mum”. (9.-10.) The Court ordered the parties to mediation, which failed to produce an agreement. There were news reports and rumors about a variety of purchasers trying to pull a deal together – Sun Capital, the Mexicans, any large food manufacturer or equity fund was fair game. None of these rumors came to pass and, on November 27, the Court granted the company’s motion to wind-down the business.

What’s the takeaway from all of this? If the BCT knew that a strike would have crippled the company and threatened administrative insolvency, would they have done anything differently? Some of the court filings indicate that they refuted the premise. A cynic might also take away that they just didn’t care. I prefer to view it in the context of deal fatigue. The only thing more exhausting than renegotiating a collective bargaining agreement is re-negotiating 372 of them – and that goes equally for the company and the unions. It’s possible that the BCT, recognizing that it had the power to disrupt the company to make its point, didn’t realize that disruption could also kill the company, and thereby failed to realize that the same leverage might have gotten a better deal in the form of long-term upside. Perhaps the need to go back and renegotiate changes like that with the Teamsters would have taken so long that it would have doomed the company regardless.

Perhaps the last deal on the table was, in every possible sense, the last deal – calling something a last, best and final offer doesn’t provide much wiggle room for changing terms to get to an agreement later on. A few things are clear. Nearly 19,000 people will lose their jobs because, in the face of an ongoing liquidity crisis, a dwindling borrowing capacity and a softening consumer market, a minority of those employees elected not to accept modifications to collective bargaining agreements. The likelihood of the unions having an advantageous bargaining position with any subsequent purchaser is pretty remote – buyers won’t be excited about signing up a union that knowingly killed the company in its prior iteration. Everyone can probably agree, however, that a company emerging from bankruptcy with 372 untouched collective bargaining agreements, and none containing any provision for modification in the face of fundamental changes in business, will probably not be happening again. And so, the position of “fulcrum creditor” in a complex chapter 11 case will shift even more.

 
ENDNOTES

1.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd
2.    In re Interstate Bakeries Corporation; United States Bankruptcy Court for the Western District of Missouri. Case No. 04-45814
3.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 174
4.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1483
5.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1544, P.2.
6.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1649
7.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1790
8.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No. 1710
9.   United States Bankruptcy Court – Southern District of New York: Case No. 12-22052-rdd, Docket No.1748, P. 2.
10. Seriously?