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.