Share This Page

Hostess buyer will likely need to spend big on modernization

| Tuesday, Dec. 4, 2012, 7:04 p.m.

Aging infrastructure. Balkanized union rules. Health food. Inefficient management. Crushing debt.

Those ingredients formed much of the toxic recipe that pushed 82-year-old Hostess Brands Inc. into liquidation last month, ultimately shoving 18,500 workers onto the pavement.

The Irving, Texas-based maker of Twinkies and Wonder Bread is now preparing to sell off its assets, a process that has attracted a flood of interest from “serious buyers (who) are expecting to spend substantial sums,” said Joshua Scherer, an adviser to Hostess. He estimates the assets could fetch $1 billion.

Many of the problems that beset the beleaguered snack maker — the existing union contracts, the debt and potentially some of the buildings — will be not-too-distant memories by the time new bosses step in.

But even with bankruptcy's cleansing effect, any new maker of Ho Hos or Ding Dongs will have to invest heavily to transform a 20th-century icon into a company that can compete today.

“I don't think just changing the players is going to solve the problem,” said Sam Hamadeh, founder of PrivCo, which provides financial data on privately held companies.

“The new owner will have to invest in product innovation for the existing products and modernizing Hostess' plants and baking facilities to incorporate healthier ingredients.

“It's not the same consumer it was 50 to 60 years ago.”

The Hostess Brands that's now dissolving like a doughnut in milk is an amalgam of companies grafted together over eight decades to create one of the largest bakers in the United States.

In 1930, Interstate Baking Co. was formed by Ralph Nafziger, who hailed from a family of bakers. He merged Interstate with his other company, Schulze Baking Co., which made Butternut bread.

More mergers and acquisitions added to the company's girth but also planted the seeds of its undoing.

When Hostess filed for bankruptcy protection in January — just three years after Interstate exited bankruptcy and changed its name to Hostess — it operated 36 bakeries, about 560 distribution centers and 527 bakery outlet stores throughout the U.S.

Of the 19,000 workers drawing a paycheck in January, 83 percent belonged to 12 separate unions and were subject to 360 collective bargaining agreements, the company said.

Nearly 93 percent of the unionized workforce belonged either to the International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union.

That gave the two unions the power to virtually shut Hostess down.

Management, which acknowledged that not enough was done to upgrade the company's plants or menu, blamed Hostess' demise on a weeklong strike by the bakers that began Nov. 9.

Noting that the company has had six CEOs since 2002, the bakers union countered that years of mismanagement and inconsistent leadership burned the bread-maker.

One particularly vexing turn came last year. Then-CEO Brian Driscoll was awarded a 240 percent pay raise (to more than $2 million) and at least eight other top execs received large pay increases, according to the bakers' union.

Driscoll left abruptly after the January bankruptcy case was filed.

Without confirming the numbers, Hostess said in April that the four highest-paid executives accepted a proposal from the current chief executive, Gregory Rayburn, to cut their salaries to $1 per year. Four other executives volunteered to reset their salaries to the prior levels.

In a court filing, the snack maker estimated that as of June 2, it had assets of $1 billion and liabilities of $2.5 billion, “which figure includes over $1 billion in pension and MEPP liabilities.”

Hostess is no stranger to debt. Interstate left bankruptcy in early 2009 with more debt than when it went in. Its exit strategy included long-term debt totaling about $670 million.

With interest and additional borrowings, that figure swelled to $861 million by the time Hostess landed in bankruptcy court this year.

That debt will not transfer to a new owner. The company is seeking to sell assets through a “363” sale, which allows the property to change hands free of liability.

The impact of the company's union legacy on a new owner depends on who the new owner is and what it buys.

News reports have listed several potential buyers, including Sun Capital Partners, which has no baking operations in its portfolio.

Hostess is in talks with 110 parties interested in its assets, Scherer, the financial adviser, said in court last week. At least 70 have signed nondisclosure agreements.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.