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Hostess judge asks for mediation sessions over strike

By Dawn McCarty

Bloomberg News

POSTED:
LAST UPDATED: 11:18 a.m. HST, Nov 19, 2012


Hostess Brands Inc.’s bankruptcy judge said he wants the company and union leaders to enter mediation Tuesday to develop an understanding of the reasons for a strike that the baker said will force it to liquidate.

U.S Bankruptcy Judge Robert Drain said at a hearing today in White PlainsNew York, that there are “serious questions as to the logic behind the decision to strike” and talks should occur immediately. Hostess’s lawyers said strikers were still outside the company’s facilities today.

Hostess is seeking permission to pay bonuses to key managers while closing operations that will leave most of its 18,500 workers unemployed as its begins a liquidation that may attract bids from private-equity firms and rivals.

Hostess said Nov. 16 that it would shut down, claiming that a weeklong strike by its bakers’ union forced liquidation. The union blamed management’s concession demands, while some employees blamed both sides.

The U.S. trustee, a Justice Department official responsible for protecting creditors, today asked Drain to take control of the liquidation away from the company. U.S. Trustee Tracy Hope Davis asked the judge to convert the case to a Chapter 7 from Chapter 11 bankruptcy, based partly on the company’s intent to pay bonuses, and appoint a trustee to supervise the wind-down.

Insider Bonuses

Hostess officials “have not demonstrated that the insider bonuses are permissible,” Davis wrote in a court filing.

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.

Shutdown Costs

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 last week.

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. Keith Hancock, a spokesman for Thomasville, Georgia-based Flowers, didn’t say whether it would bid.

‘More Attractive’

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 or the trustee’s motion. 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 last week.

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

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






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