Hostess Goes Potbelly Up

The 33 bakeries and 565 distribution centers around the country that make Twinkies, Ding Dongs, Wonder Bread and a whole slew of other disgustingly delicious but bad for you snacks have turned off their ovens and shut their doors. At the factories, the remaining inventory has been divided up and sent out on trucks to fill only a part of the final orders that have come in from delis and supermarkets everywhere. The hoarding, in freezers, has begun. The bidding wars have started on eBay. Hostess Brands has gone belly up. And it’s going to be a whole new world out there.

There is something to be said about how this shocking thing could have happened. Most people think the cause is a baker’s union that refused to ratify a proposed contract that would have them take pay cuts. It’s much more complicated than that. And the union refusal, though the straw that broke the camel’s back, should not be assigned the blame.

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The company that today is called Hostess Brands began in 1930s when a scientist, James Dewar, discovered that it would be possible to inject a cream into the center of a sugar bun, thus inventing the Twinkie.

“The Twinkie was the best darn-tootin’ idea I ever had” he said at the time.

The company was for many years called Interstate. In the 1960s and 1970s it expanded by buying up makers of other junk food snacks. Thus folding into the corporation were Ding Dongs, Ho Hos, Funny Bones, Ring Dings and Sno Balls—the remarkable cupcake coated with gooey marshmallow that on St. Patrick’s Day becomes green, on Halloween becomes orange, and at Eastertime becomes lavender. A few years later, the company paid $330 million for Continental Baking, the maker of Wonder Bread and Hostess Snacks. This gives you an idea of the scale of this operation. It then changed its name from Interstate, Inc., to become
Hostess Brands.

All this was very well and good. These snacks have been and continue to be very, very popular. You could make money selling them. But something was going very wrong behind the scenes.

Here was the trouble in Paradise. Nutritionists were attacking the makers of junk food. The consolidation of the brands into Hostess had come about because there needed to be a circling of the wagons. Inside the circle were Hostess Sno Balls, Ring Dings, Yankee Doodles, Funny Bones, Yodels, Hostess Cupcakes, Twinkies, Yoo Hoos, SuzyQs and Raspberry Zingers. Circling around on horseback whooping and hollering were the environmentalists, nutritionists and regulators, slowly closing in. The attack was working. In spite of themselves, the public was consuming fewer and fewer of these snacks.

And so it was that in 2004, Hostess Brands went through the first of what ultimately would be two bankruptcies.

No large food company, Nabisco, General Foods etc., etc., had any interest in taking over Hostess and bringing it out of this first bankruptcy. But a group of Wall Street backers, not in the baking business, took out their sharp pencils and figured out how to do it and make money at it. They’d buy the company—with the court’s approval of course—and get pay and benefits concessions from the unions.

The real mistake they made, however, was to make too little of the purchase price with their own money and too much of the purchase price from a bank loan assumed by the company itself. (This is called loading up the debt.) In other words, on the books of the revived Hostess Brands every month was a line for “interest” due to borrow the money to pay for the purchase. It was a staggering amount.

Wall Street, in the end, although making tens of millions of dollars in fees, had created a new company that could not make money to pay this whopping cost—unless further cuts could come by squeezing the workers again.

There are 12 unions at Hostess. The workforce is 18,500. Eleven of the unions went along with the new austerity measures, which would include a pay cut, this time 8% more, and further damage to their medical insurance and pension plans.

The 12th union was the Bakery, Confectionery, Tobacco Workers and Grain Millers International, and its workers at Hostess amounted to the second largest union in the work force. They rejected the proposal.

The New York Times reported on what their union president had to say.

“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years,” said Frank Hurt. “They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and ‘restructuring specialists’ walk away with untold millions of dollars.”

And so, horribly, 18,500 people have lost their jobs. And the big loan will become a debt that, in liquidation, will largely reduce what the creditors get.

According to the Times, the company reported revenue of $2.5 billion in 2012. But for that year, they spent, or tried to spend, $3.6 billion in costs, most of which, according to the Times, was for the costs involved in the bankruptcy.

What happens next? In liquidation, the company sells off all its assets piecemeal with the money raised divided up among the creditors. It’s usually a certain number of cents on the dollars. So the creditors get at least something. I honestly don’t know where the cost of the bankruptcy and the loans owed because of the 2008 purchase fit into this, but it’s probably at the end of the line.

As for all these now defunct products, will they ever return to the shelves? Wall Street analysts, interviewed by the Times, think that some of the brand names can bring in quite a pretty penny for the creditors.

The reporter from the Times interviewed Burt P. Flickinger III, the managing director of the Strategic Source Group, who said he thought Hostess and Twinkies, as names, would easily get sold because they were national brands. He described lesser-known brand names such as Ding Dongs as “a jump ball,” and the still lesser- known names as a hard sell. He also didn’t think much of the prospects of selling the name Wonder Bread. This had been a popular brand when the baby boomers were young. But it has been in decline, younger people don’t care as much about it, and it now takes up limited space on store shelves. Probably it would go by the wayside.

We shall see.

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