The Right Opinion

Hostess Brands on the Brink

If unions don't stop striking, "the company will probably liquidate everything in a matter of days."

By Arnold Ahlert · Nov. 16, 2012

Few things are sadder than the triumph of ideology over reality. Yet it appears that the bakers union at Hostess Brands, an iconic company best known for such products as Wonder Bread and Twinkies, prefers running the company completely into the ground, rather than accept the necessary cuts in employees' pay, health and pension plans that would keep it afloat. On Monday, another dose of reality was added to the mix: Chief Executive Gregory Rayburn announced that Hostess would be shutting down plants in Seattle, St. Louis and Cincinnati – permanently. Six-hundred twenty-seven jobs will be lost permanently. “Our customers will not be affected because we will continue to serve them from other Hostess Brands bakeries,” said Rayburn in a press release. “We deeply regret this decision, but…we will close the entire company if widespread strikes cripple our business.”

The unions apparently can't read the writing on the wall. Hostess filed for Chapter 11 bankruptcy in January 2012 for the second time since 2004. The company cited the high cost of pensions and outstanding debt as the reasons for that filing. In October, the company filed a plan with the federal bankruptcy court in New York. It called for an 8 percent cut to employees' wages, a reduction in health benefits, and a freeze in pension plan payments for over two years. In return, unionized employees would get a 25 percent equity stake in the company, two seats on its board of directors, and an interest-bearing note worth $100 million. The 8 percent wage cut was part of a five-year deal that included a 3 percent wage increase in the next three years and a 1 percent raise in the final year.

On October 3, Judge Robert Drain of the United States Bankruptcy Court Southern District of New York approved the motion to impose changes to collective bargaining agreements with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM), which represents 6,600 Hostess employees. This decision followed a rejection by the union in September to such cuts. According to Hostess, one of the key drivers of this agreement was the failure to find a third party interested in buying the company. Because that didn't happen, Hostess was forced to deal with existing lenders who agreed to fund Hostess's exit from Chapter 11 in exchange for employee concessions.

Ironically, Hostess's decision to seek relief in court was driven by the fact that the one of the company's other major unions, the International Brotherhood of Teamsters, voted narrowly to accept the proposed agreement. Teamsters General Secretary-Treasurer Ken Hall characterized accepting the agreement as “a difficult decision." Hall further noted that the Teamsters were "frustrated at being in the position to bail out the company again, but overall were willing to accept modifications with the hope that Hostess will recover and be in a better position in the years to come,” he said in a statement. Last Sunday, the Teamsters claimed they didn't know about the impending strike by the BCTGM.

Whether they did or not is largely irrelevant. The BCTGM whose 5,680 workers account for about 30 percent of Hostess's total work force, kicked off their strike last Friday, citing the “horrendous contract” the company imposed as motivation. “The BCTGM International Union stands in full and uncompromising support of our striking members,” BCTGM International President Frank Hurt said in a statement Friday.

Thus, as of Monday, 23 of Hostess's 36 plants had picket lines set up in front of them. About half of those 23 plants were still able to produce and deliver products, due to the reality that management, as well as some union members who were not striking, crossed the picket lines to work.

Hostess spokesman Lance Ignon once again stressed what the BCTGM refuses to hear. “If we're not able to resolve this issue, the company will probably liquidate everything in a matter of days,” he revealed. “There's a misconception that there is a buyer set to buy Hostess. That is simply not the case. There is no white knight waiting to purchase Hostess and willing to provide better wage and compensation packages.”

Hurt was unimpressed. “Hostess Brands is making a mockery of the labor relations system that has been in place for nearly 100 years,” he said in a statement. “Our members are not just striking for themselves, but for all unionized workers across North America who are covered by collective bargaining agreements.”  He further stressed that while he is aware liquidation is a real possibility “people will only take so much” when it comes to wage and benefit reductions.

Adding to the intrigue, the Teamsters, who crossed picket lines over the weekend and are currently cooperating with the company to deliver baked goods around the nation, may reconsider their position. On Monday, Secretary-Treasurer Hall noted that his union was examining various contract provisions, specifying what actions various Teamster locals can take when another Hostess labor group goes on strike. If it is determined that honoring the BCTGM picket line is contractually sanctioned, the 7,500 Teamsters that represent about 40 percent of Hostess's labor force will join the walkout.

Thus, the statement by CEO Rayburn, that the timeline to decide whether or not forego re-organization and begin wind-down proceedings can be measured in “days, not weeks,” has made no impression. “This is a situation that needs to be resolved in days and not weeks, so it's really going to hinge on whether the bakers who are striking decide to come back to work,” Rayburn insisted. He further noted that the bakers union has made no specific demands and that the two parties are not engaged in negotiations. Rayburn also stressed the company has “zero” tolerance for re-vamping the court-ordered deal reached in October.

Last week, the company announced that  a widespread strike would prompt them “to liquidate if we are unable to produce or deliver products” and it would then lay off most of its 18,300-member workforce “and focus on selling its assets to the highest bidders.” Yet the BCTGM remains immovable. On its website, it maintains that even if Hostess emerges from bankruptcy under the current plan, “it will still have too much debt, too high costs and not enough access to cash to stay in business for the long term.”

Ironically, the largest amount of that debt is owed to the unions themselves. When Hostess filed with the bankruptcy court, the company disclosed that its biggest unsecured creditor is the Bakery & Confectionary Union & Industry International Pension Fund, which it owes approximately $944.2 million. Its second-largest unsecured creditor, Central States, Southeast and Southwest Areas Pension Plan, is owed about $11.8 million. Hostess's entire debt obligation is just over $1 billion. Thus, Hostess workers likely face not only a loss of their jobs, but their pensions as well, if the company goes under.

Hostess workers' compensation range from $16-$18 per hour on the low end, to more than $80K on the high end. Yet University of Indiana professor reveals the reality of the business model. “The business is very much small profit margins, high labor cost,” he said. “So if you cannot reduce your hourly cost and if you cannot reduce your healthcare expenses, then you just can't compete. The profit margins just aren't big enough.”

Are such wages, plus benefits and healthcare, better than nothing? That is for the union workers to decide. Unlike their public sector counterparts, they are faced with the reality that the ultimate arbiter here is liquidation. As of now, that means nothing to the BCTGM. Within the next couple of weeks, nothing may be what remains where Hostess Brands used to be.

Arnold Ahlert is a columnist for FrontPage Magazine.

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18 Comments

Doktor Riktor Von Zhades in Western KY said:

For the life of me, I fail to understand how the concept of being unemployed does not resonate with unions and their workers. I will miss those ding dongs; the cakes that is.....

Friday, November 16, 2012 at 8:51 AM

d.w.hudson in Michigan said:

And Atlas Shrugged.

Friday, November 16, 2012 at 9:24 AM

wjm in Colorado said:

Another Union success story, 18 thousand plus more leaches existing at the expense of the producers. Hostess announced liquidation this morning. This should be our plan for the Democrat Marxists, give them just what they deserve, NOTHING! Let them live with their idiocy. They can commiserate with each other on their Obamaphones. Maybe Obamao will nationlize Hostess, like GM, government motors meets government cakes, both will continue to operate at a loss.

Friday, November 16, 2012 at 9:33 AM

David S. in Baton Rouge, LA said:

The unions are owed $944 Million dollars. And under the bankruptcy (which they are the cause of), they might see 0.0001% of that.

XD

Friday, November 16, 2012 at 9:48 AM

Gregory in Yakima said:

Arnold Ahlert frames this bit of news in a way that will appeal to anyone eager to misunderstand. National trends toward eating healthier play an unmentioned part if this unfortunate story. Too bad management didn't seek to diversify from artery choking, diabetes inducing junk food before they discovered themselves to be an anachronism of business wallowing in a tar pit of their own making.

How simple to blame the union workers for accepting a contract offered by management and then wanting management to live up to their contractual obligations. They're so unreasonable.

At heart is a stand against the ever steady erosion by corporations of workers making a livable wage. This business failure is the failure of this business, not the baking industry. The baking industry is not going out of business. It's quite healthy and those bakeries with the foresight to evolve with the times are growing.

Conservatives say business is survival of the most competitive, but when a business fails they look for scapegoats. Too bad for the workers but they have already made their concessions and they cant give any more without defaulting on their home and car loans.

Friday, November 16, 2012 at 10:34 AM

Jayve in ABQ, NM replied:

The deaf, dumb and blind speaks up once more. This company thrived for 82 years and the union sucks the life out of it. So, when a business fails we conservatives look for scapegoats huh? When business fails, liberals look to government to keep them solvent at someone elses expense. Unions are a disease on business and it doesn't take a genius to see that, but we both know you are far from that.
Hostess dies because of awareness of healthy eating? What kind of stupid BS dribble is that? Guess we all get to thank Moochelle for opening the eyes of us stupid fools because we don't know how to eat right. Go change your diaper Greg, I'm smelling a load of s**t.

Friday, November 16, 2012 at 11:07 AM

Rod in USA replied:

Here is the BLUF: This scenario is STRAIGHT out of *Atlas Shrugged*.

Who is John Galt and where is Galt's Gulch?

Friday, November 16, 2012 at 12:51 PM

Army Officer (Ret) in Kansas replied:

Greg,

If you are that concerned, feel free to put your OWN money where your mouth is. You can send your donation to the Bakery & Confectionery Union & Industry International Pension Fund to ensure that these guys who are about to strike themselves out of a job have a pension. Their address is:

B&C Trust Funds
10401 Connecticut Avenue
Kensington, MD 20895-3960

I'm sure they will be happy to cash your check.

Friday, November 16, 2012 at 11:10 AM

Rod in USA replied:

Your statements as usual are loaded only with class-warfare rhetoric not bounded by logic or reason. You fail to understand the nature of business and that business must survive in a changing environment.

Friday, November 16, 2012 at 12:53 PM

CA Conservatiive in Red Dot, Blue State replied:

Greg, You make an assertion that Hostess is at fault for not changing with the times but offer no evidence. What is it that Sara Lee and others have done that Hostess hasn't? Most of all you miss the point when you say "Too bad for the workers but they have already made their concessions and they cant give any more without defaulting on their home and car loans" So how does their refusal to give concessions today help with their home and car loans today? Any response Greg, or as usual you drop your comments and then just sit back an laugh at the responses. Seems a tad cowardly to me.

Friday, November 16, 2012 at 1:11 PM

JH in Indiana said:

First, there is no such thing as "University of Indiana."

Second, what the the name of the professor quoted in the the second to last paragraph?

Friday, November 16, 2012 at 11:26 AM

P. Long in Texas replied:

JH, if you really, really do live in Indiana, you need to get out more. All one has to do is visit google and ample evidence of the university shows up immediately. Only one entry http://en.wikipedia.org/wiki/Indiana_University. There are lots, including a link to the athletics department. Try again.

Friday, November 16, 2012 at 1:02 PM

Joeboy in Idaho replied:

JH Is right. There is NO "University of Indiana" What you referenced is "Indiana University". May seem like simple semantics but it is not.

"Idaho State University" and "University of Idaho" two completely different entities. "New York University" and "University of New York" completely different entities. I could go on all day.

Universities have official names. If the professor in question is at "Indiana University" that's what the articles should have said, instead of saying, "University of Indiana" which does not appear to exist.

Friday, November 16, 2012 at 3:14 PM

P. Long in Texas replied:

Absolutely right. An apology to JH.

Saturday, November 17, 2012 at 7:12 AM

Tod the tool guy in brooklyn ny said:

Once in a while, back in 1971, we'd make baloney sandwiches with Hostess wonder bread. The bread was so soft that it would almost melt around the cold cuts like grilled cheese! The twinkies were too sweet, even for a ten-year-old.O.K. to the present---Foward off of a cliff. Blind sheep will obey OBONGO. From the frying pan---into the fire!!!Union workers solidarity- all the way to the unemployment line!!!

Saturday, November 17, 2012 at 6:12 AM

Alex in NJ said:

The longshoremen put the Brooklyn waterfront out of business years ago.
These union boss thug don't care if the rank and file lose their jobs.

Sunday, November 18, 2012 at 8:58 AM

Dan in Vermont said:

You have to admire the concern for the families of the union employees with this comment: "people will only take so much" when it comes to wage and benefit reductions. What will they say when the reductions leave them with nothing for wages or benefits? Join the Obama welfarites?

Sunday, November 18, 2012 at 10:06 PM

jballz in northern arizona said:

Let me get this right. The management "borrowed" $950 million from the workers pension fund, used that money to facilitate "owning" the company, paid themselves huge salaries, paid the banks huge interest payments, and then determined they could no longer operate because they were overpaying their employees by 8%.

How much were they overpaying their banker for interest on capital they borrowed from the US taxpayer at 0%?

How come none of this is discussed in this 'discussion', If I didn't know better I would think there was a directed attempt to brainwash people into believing post-LBO bankruptcies are the fault of unions. But I fear it is a function of total ignorance of finance, it is just easier to blame unions if unions are the highest level of organized industry you can actually understand.

Tuesday, November 20, 2012 at 10:02 PM