Hostess Redux

When Hostess entered a federal bankruptcy court in
the summer of 2012, there was near hysteria among some that this was the death
of Twinkies and other famed snacks. It wasn’t long before Twinkies were listed
on eBay, often with an asking price at a significant premium to their retail
price[1].  Clearly, Hostess products still had a strong
market. Hostess had the kind of consumer base most businesses dream of. So what
happened? People wanted to know who was to blame for the demise of such iconic
treats as Twinkies and Ding Dongs? Fingers started to fly.

The two main unions involved with Hostess were the
Teamsters Union and the Bakery, Confectionery, Tobacco Workers and Grain
Millers International Union (bakers’ union). One common place for the fingers
to land has been squarely on them. Some commentators likened the death of
Hostess to a calculated contract “hit” by the unions[2].
Others blamed “parasitic” unions for killing the company[3]. 

Hostess has been around in one form or another since
the 1920’s. With any company as large and as storied as Hostess there will
almost always be more than a single cause for its demise, and that is certainly
the case here. Despite the lopsided presentation of union complicity in the
woes of Hostess, if one were to identify a single cause, only those who
approach the situation with an anti-union bias could possibly conclude the
unions were that cause.

Though the company had a bevy of loyal customers,
CNN reports that Hostess sales began to decline in the 1980s and 1990s as more
health-conscious consumers forsook snack cakes and other Hostess products, like

By 2004 the company was nearly a half-billion
dollars in debt and filed for bankruptcy. To keep the company afloat, the
unions made large concessions, taking wage reductions anywhere from 28-32%,
giving up thousands of jobs and millions in benefits. Aided by these concessions
the company was successfully reorganized after five years. When Hostess
re-emerged in 2009, it did so infused with fresh capital from Ripplewood
Holdings, a private equity firm and Silver Point and Monarch, each hedge fund

Silver Point and Monarch typically invest in
distressed companies[4].
Some say they exemplify vulture capitalism of the sort President Obama was so
critical of when he discussed Mitt Romney’s record at Bain Capital. The basic
strategy of these hedge funds is to invest in companies that are essentially
good companies but which have negative capital structures. Capital structure
refers to the manner in which a company finances its assets, through debt or
equity, for example. The types of capital structure that would be attractive to
Silver Point and Monarch are made so by corporate stresses like bankruptcy.
Such liabilities of an otherwise good company allow for it to be bought at a
steep discount.

Allowing Hostess to emerge from bankruptcy in 2009,
the lenders forgave half of the company’s debt, provided a new secured loan of
$360 million and converted the other $225 million of debt into payment-in-kind
loans, a type of financing often used when a company has an above-average risk
of default. Ripplewood had already invested $130 million. Ripplewood’s
investment, plus the money from the lenders, meant Hostess came out of
reorganization with $490 million. The company also had weaker unions due to the
concessions unions made to keep the company alive.

This was supposed to turn Hostess’ fortunes around.
It didn’t. Hostess may have come out of Chapter 11 reorganization in 2009 with
$490 million, but it did not come out free from debt. Hostess had $670 million
in debt in 2009 and the lenders were charging fairly high interest rates on the
loans to the company. When early 2012 rolled around, Hostess’ debt had climbed
to over $800 million, largely due to interest owing on loans. Sales had also
been declining and the Global recession had increased Hostess’ operating costs
by forcing up the price of many of the staples Hostess relied on to make its

The lenders infused Hostess with more money, but
also went to the unions in search of more concessions. The unions, however,
still weary from the first round of concessions, denied any requests for
further concessions. In January, 2012, Hostess filed for Chapter 11 protection

In August of 2011, in breach of existing collective
agreements, Hostess began diverting union pension contributions in order to
fund operations[6].
So stellar was the Hostess management that Hostess does
not know how much it diverted from the pensions[7].  
The company taking
pension funds in breach of collective agreements was not enough. The lenders
wanted more concessions from the unions. Without such concessions, the hedge
fund lenders made clear they would withdraw their support from Hostess.

In the interests of saving jobs the Teamsters agreed
to take reductions in pay and benefits. The bakers’ union took a different
tack. The bakers’ union refused to give more concessions and went on strike.
The hedge funds withdrew their support and Hostess sank[8]. And
as Hostess sank the chorus of voices blaming the unions rose.

There has always been consumer demand for Hostess
products, albeit a waning demand. For the company to reach the point of
liquidation has little, if anything, to do with the unions. Anti-union voices
have loudly blamed unions for the demise of Hostess, however, arguing that if
only the unions would not have been so stubborn, Hostess would still be in full
operation. If the union workers are out of work, the line goes, it’s because
they chose to be.  This is sleight of
hand. It shifts the blame from the Hostess management which failed to adapt to
changing market conditions and which couldn’t effectively manage a company with
many beloved products and places the blame squarely on the workers who makes
those products.

Besides ignoring the fact that the company
squandered the union concessions and raided the workers’ pensions, calling the
unions “parasitic” also ignores the fact that the lenders sucked Hostess dry
while simultaneously increasing the company’s debt and all but ensuring the
company’s bankruptcy through exacting interest payments the company could not

While going through liquidation last November,
Hostess successfully requested $1.8 million in bonuses to be paid to 19
executives as an incentive for the executives to stay with Hostess and oversee
the liquidation process[9].

Thousands of
union members lost
their jobs when Hostess liquidated, and the executives who couldn’t manage the
company well enough to keep it out of the red, got bonuses in order to oversee
the company’s liquidation. With this kind of management is it any wonder the
bakers’ union opted to strike?

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