Hostess Asks Court to Approve Closure as Bidders Circle

(Businessweek) – Hostess Brands Inc., the bankrupt baker of Twinkies and Wonder bread, will seek permission to pay  bonuses to key managers while closing operations that will leave  most of its 18,500 workers unemployed as it begins a liquidation  that may attract bids from private-equity firms and rivals.

U.S. Bankruptcy Judge Robert Drain is set to consider Hostess’s request to close its distribution centers and 36 bakeries at a hearing today in White Plains, New York. Hostess  said Nov. 16 that it would shut down, claiming that a weeklong  strike by its bakers’ union forced the liquidation. The union  blamed management’s stiff concession demands for the collapse,  while some employees blamed both sides.

Sally Greenberg, executive director of the Washington- based National Consumers League, accused Hostess executives  in a statement of “scapegoating” the union, “rather than take  responsibility themselves.”

In seeking court permission for its demise, Hostess  said it wants to pay as much as $1.75 million in incentive  bonuses to 19 senior managers during the liquidation. Hostess  is asking the judge to approve its plan — which would result in the firing of thousands of employees — to shut down 36  bakeries, 242 depots, 216 retail stores, and 311 hybrid depot- store facilities, according to court filings. There are 58  other leased or owned sites used for storage, warehousing of  products or parking.

The process requires “intensive” planning, staffing and  funding, the company said. A fire-sale liquidation would damage  equipment and result in improper disposal of waste materials.

It’s “not a simple matter of turning off the lights and  shutting the doors,” Hostess said in court papers.

Shutting Plants

The baker estimated that shutting the plants will cost  $17.6 million in the next three months. The plants have about  $29 million worth of excess product ingredients, Hostess said. About $6.9 million will be spent to close depots, while  $8.8 million will be used to idle retail stores and  $8.1 million will go to shutting corporate offices, according  to a court filing. Perishable baked goods at retail stores will  be sold at going-out-of-business sales, donated to charity or  destroyed, Hostess said.

Potential bidder  C. Dean Metropoulos & Co., owner of  Pabst Brewing Co., said it may seek to purchase Hostess’s  “iconic brands,” which include Dolly Madison, Drake’s, Merita  and Butternut. Flowers Foods Inc. (FLO), maker of Nature’s Own bread  and Tastykake snacks, also may pursue some of its rival’s  assets, wrote William Chappell, an analyst with SunTrust  Robinson Humphrey, in a note to investors.

`Eligible Acquirers’

Flowers is “one of the most eligible acquirers” of Hostess assets and brands, Amit Sharma, an analyst at BMO Capital Markets Corp. in New York, said in a separate note, citing Flowers’ management, acquisitions and “relatively small” overlap with Hostess’s major markets and products. Flowers didn’t say whether it would bid.

“We are staying focused on making sure our consumers  and customers have the baked foods they need,” Keith Hancock,  a spokesman for the Thomasville, Georgia-based company, said  in a statement.

Metropoulos, which paid $250 million for Pabst in 2010, said it looked forward to participating in the bidding. Daren Metropoulos, a principal of the Greenwich, Connecticut-based private-equity firm, said of Hostess in a Nov. 16 e-mail that “shedding the complications of the unions and old plants makes it even more attractive.”

Tom Becker, a spokesman for Hostess, declined to comment on potential bids. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said.

`Difficult Prospect’

“We will try to get what we can from the assets,” Rayburn said in an interview on Bloomberg Television. “It’s an over- capacity industry, though, so that’s going to be a difficult prospect.”

David Margulies, a spokesman for Bimbo Bakeries USA, didn’t respond to a call or e-mail seeking comment on that company’s  potential interest in Hostess assets. Bimbo, based in Horsham, Pennsylvania, is the U.S. division of Mexico’s Grupo Bimbo SAB, the maker of Entenmann’s cakes and Thomas’ English muffins.

Hostess, based in Irving, Texas, said in court papers the liquidation will take about a year and about 3,200 workers will be retained to clean bakeries and mothball equipment. The plants are in 22 states, stretching from Alaska to New Jersey.

Declining Sales

The 82-year-old maker of Hostess CupCakes, Ding Dongs and Ho Hos has endured years of declining sales as Americans turned to rivals’ snacks and breads, while ingredient costs and labor expenses climbed.

Hostess said it was pushed toward liquidation when the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike Nov. 9 after Drain imposed contract concessions opposed by 92 percent of the union’s members. The union represents about 5,000 Hostess workers.

Hostess closed three plants permanently Nov. 12, blaming the strike, and warned that the company would liquidate unless enough employees returned to work to resume normal operations.

The liquidation is a “deep disappointment for all of our Hostess members,” bakers’ international union President Frank Hurt said Nov. 16. If members hadn’t accepted concessions earlier, “this company would have gone out of business long ago. Our members decided they were not going to take any more abuse.”

Secret Ballot

The International Brotherhood of Teamsters, representing about 6,700 Hostess employees, had urged the bakers’ union to let members decide by secret ballot whether to continue the walkout. Drivers represented by the Teamsters earlier ratified a new contract with 8 percent in wage concessions and 17 percent in benefit reductions.

“The company has clearly been mismanaged for some time,” the Teamsters said in a statement. “Unfortunately, the company’s operating and financial problems were so severe that it required steep concessions from a variety of stakeholders but not all stakeholders were willing to be constructive.”

Hostess sought court protection in January, its second time in bankruptcy, listing assets of $982 million and debt of  $1.43 billion. The Teamsters and the bakery workers’ union made  voluntary concessions in the first Chapter 11 reorganization, which began in 2004.

As consumers over the weekend purchased what may be their  last Twinkies or Ring Dings following news of the liquidation,  bids by potential suitors for the famous brands may mean they  will continue to be available in U.S. stores.

C. Dean Metropoulos, founder of the namesake firm, has  specialized in buying struggling brands, such as Chef Boyardee  and Bumble Bee Tuna, and turning them around. The firm said it  paid close attention to Hostess during its bankruptcy.

“We have analyzed this opportunity very carefully for a few years now,” Daren Metropoulos said.

Management Blamed

Last week, as news reached employees at a Wayne, New Jersey Hostess plant, Rodica Salazar, 62, blamed management for the  collapse. She said she worked at the company for 15 years.

“They don’t think about our lives, how you’re going to  live, how you’re going to pay,” Salazar said. “I feel sorry  for people, but not for them.”

Misty Williams, 40, said she worked at the company for  14 years. She expressed shock that management and union leaders  had let their dispute end in such a catastrophe for 18,500 workers.

“They were just too stubborn, I guess, the union and management,” she said.

The new case is In re Hostess Brands Inc., 12-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains).

To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware,  at  dmccarty@bloomberg.net; David McLaughlin in New York at  dmclaughlin9@bloomberg.net; Phil Milford in Wilmington, Delaware  at  pmilford@bloomberg.net.

To contact the editors responsible for this story: John Pickering at  jpickering@bloomberg.net; Michael Hytha at  mhytha@bloomberg.net.