Hostess Brands is nothing like a Twinkie.
The parent company's fate rests with a constituency that has grown hardened and sour.
Union members, taxed by the givebacks already granted to an employer that's operated in bankruptcy for all but three of the past eight years, are to vote this week on the latest batch of negotiated concessions.
Approval means another round of cuts. Wage compensation would immediately drop 8 percent for everyone, even management, but with the promise of a 3 percent bump the next year of the five-year deal. There would be sharp reductions in pension plan payments.
Rejection means an expedited sell-by date for the maker and distributor of foodstuffs of your childhood lunchbox: Hostess Twinkies, Ho Hos, Cup Cakes, Ding Dongs, Sno Balls, Donettes and pies; Butternut, Holsum, Home Pride and Wonder breads; Dolly Madison Zingers and Donut Gems and Drake's snack cakes, among other favorites.
There's no way to sugarcoat it.
"I plan to liquidate it if they vote no. That plan has been on the shelf for months," Hostess chief executive Gregory Rayburn said the other day after meeting with bakery workers in Schiller Park, birthplace of the Twinkie 82 years ago, as part of a national "town hall" tour of the Texas-based company's far-flung operations. The company filed for Chapter 11 protection in January.
"This is their second time through and that's what drives a lot of the frustration and the anger, because they've been through concessions before and we're back in bankruptcy," Rayburn explained in an empty office before catching a flight to Portland, Maine. "Some people will vote no because they're angry and they're just done. … But I don't think I should be painting some rosy pictures because they've been through this drill."
Hostess is at a crossroads because of problems not confined to your local grocer's shelves. Detroit was clobbered by them too: high labor and pension costs, plus ownership that failed to innovate. Where's my Hostess Ho Ho ice cream?
If the deal goes through, Ripplewood Holdings, the New York private equity firm that gained control of Hostess as it emerged from the first bankruptcy in 2009, would be out its $70 million investment.
"The last time, there were expectations of higher sales coming out of the box that were going to drive profitability and provide funding for investment in the business," Rayburn said. "Those didn't materialize. … This time around, we're taking a conservative view of what future performance is going to be. We're leaving the upside out of it."
A restructuring specialist for nearly 30 years, Rayburn was thrust into the CEO's job in March after the abrupt resignation of Brian Driscoll, just 16 days after Rayburn came aboard as chief restructuring officer. Driscoll has since taken the CEO post at Diamond Foods.
Unsecured Hostess creditors and unions in February had protested a Hostess effort in New York bankruptcy court to secure a lucrative pay and bonus package for Driscoll, who joined Hostess in 2010 and had been pushing the cost-cutting measures.
Rather than take a Let Them Eat Suzy Q's stance, the company moved to reduce executive pay in April. Rayburn has said the company's lawyers, bankers and other bankruptcy advisers will forgo $60 million in fees, a discount of about 18 percent.
And the proposal before the various collective bargaining units — the Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union represent more than 90 percent of Hostess' employees — is designed to share benefits and burdens of salvaging the company, which lost $341 million last fiscal year and carries about $1 billion in debt.
It would hardly be a collective. But if approved, the union members would get a 25 percent equity stake in the company and would be in line for $100 million of the recovered debt. Unions would get two of the company's eight board slots and one seat on the board's executive compensation committee.
"Coming out of the gate, they will have upside on the equity and their interests will be aligned with our lenders who are financing this," Rayburn said.
Ken Hall, the Teamsters' general secretary-treasurer, said in an update to affected members that the union could not endorse the package: "But given that the likely consequence of rejecting it outright means the loss of your jobs, it is our duty to inform you … what the offer means to you and your livelihoods and to let you vote on your future and the future of Hostess."
Besides cost savings from concessions, Hostess is looking to sell some or all of its Merita bakery operations in the Southeast to fund its post-bankruptcy operations. But Rayburn, who has held top positions at struggling companies like WorldCom and Muzak, said this is probably the most complex restructuring situation he has ever been involved with.
"Part of that is the second-time-around nature of it," he said. "It's also a lot of different unions. It's a lot of contracts. We've had commodity prices spiking at Dust Bowl levels for corn. But at the end of the day, the sales have held. So the good news is there is a strong platform of demand for these iconic brands."
If the unions nix the concessions, however, Rayburn said he would immediately put those brands on the block. He would prefer not to have to sell anything at all, including this proposal.
"I really don't think you can sell (the proposal)," Rayburn said. "Do I hope that they vote 'yes'? I absolutely do because I think this company could be around another 70 years. I think there's a path for success and, based on my experience, this is how this company will get there. …These are the facts. They are hard facts. The choice is a hard choice."
They'll start counting ballots Friday.
Twitter @phil_rosenthal
