Hostess Brands goes out blaming unions for its demise

By DON McINTOSH, Associate Editor

Hostess Brands CEO Greg Rayburn may have sold the business press on the claim that unions are to blame for his company’s end, but nothing could be further from the truth, say leaders of 83,000-member Bakery Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM).

“Blaming BCTGM for the liquidation is no more credible than blaming an isolated gust of wind for blowing over a tree, when it was the tree’s shallow, rotted root structure that was actually responsible,” the union said in a Nov. 19 filing in U.S. Bankruptcy Court.

Hostess, which filed bankruptcy Jan. 11 for the second time in a decade, announced Nov. 16 that it is no longer seeking to restructure but instead intends to liquidate, selling off its assets, including the right to make Wonder Bread, Twinkies, and 28 other well-known brands. But the company was run into the ground by management, not by its unions, says BCTGM President Frank Hurt.

How Hostess got into trouble the first time

In the ’80s and ’90s, Hostess bought up numerous competitors, was itself sold four times, and ended up heavily in debt, but instead of paying down that debt, the company spent its resources buying back stock to drive its share price up. For decades, management stuck with its old product line as consumer tastes changed, and failed to invest in new equipment. The company added ingredients to lengthen its products shelf-life — so that it could close plants and cut delivery routes. But quality suffered and sales dropped, and gas prices rose, diminishing the savings on products that now had to be trucked farther. In 2004, $575 million in debt, the company declared bankruptcy.

In bankruptcy, the company negotiated two rounds of wage and benefit concessions from its unions — principally BCTGM and the Teamsters — totaling $107 million a year. The unions also agreed to layoffs and plant closures that brought the workforce down to about 19,000 from more than 30,000.

[pullquote]The truth is that had it not been for the valiant efforts of our members over the last eight years, including accepting significant wage and benefit concessions after the first bankruptcy, this company would have gone out of business long ago.” — BCTGM president Frank Hurt[/pullquote]The company emerged from bankruptcy in 2009 with $774 million in debt, under the ownership of a private equity company and two hedge funds. But Hurt says managers failed to use savings from the union concessions to turn the company around. Hostess introduced no new products, continued to skimp on reinvestment, and cut back on advertising and marketing.

By mid-2011, the company was again having difficulty making payments on its debt, and in August 2011, it stopped making its required $4 million a month in pension contributions, in violation of its union contracts.

Then late last year, in what BCTGM later called evidence of bad faith, top managers had the company convert their performance bonuses into salary guarantees  — at the same time that Hostess attorneys were preparing a second bankruptcy filing. For Brian Driscoll, who’d only been Hostess CEO since June 2010, it meant a raise from $750,000 to $2.55 million.

Back into bankruptcy

On Jan. 11, Hostess filed for Chapter 11 bankruptcy protection, which allows a company to stay in business while it re-organizes and renegotiates terms with lenders, vendors, and employees. And under Section 1113 of Chapter 11, companies can reject or modify union contracts if unions turn down a company’s final offer and the judge determines it’s “necessary” for the reorganization to succeed.

In its bankruptcy filing, Hostess reported 2011 sales of $2.5 billion and losses of $341 million, and it listed $1.3 billion in debt versus $981.6 million in assets. Without a doubt, Hostess was drowning in debt, but instead of proposing that creditors take a loss, Hostess told the court it would not be able to emerge as a viable competitor unless it was relieved of significant financial commitments and work rules imposed by its collective bargaining agreements.

Yet most of Hostess’ competitors are unionized and financially healthy, including Mexican multinational Bimbo, which entered the U.S. bread market in the mid-’90s. Today Bimbo is the biggest, and is overwhelmingly union in its baking operations, and about half unionized in its distribution.

BCTGM leaders say Hostess appeared to have no reorganization plan in its bankruptcy filing beyond trying to squeeze more concessions from workers.

Meanwhile, Driscoll himself resigned March 9, and named as replacement Rayburn, who’d been hired Feb. 22 as an expert on corporate liquidations. Rayburn is founder and owner of Kobi Partners, a restructuring advisory firm. Hostess is paying him $125,000 a month.

After months of legal motions, Hostess presented to workers its demand for concessions. Teamsters approved Hostess-proposed concessions by a narrow 53 percent vote, but BCTGM members rejected them by an overwhelming 92 percent.

An “outrageous” proposal

The offer BCTGM members rejected would have terminated their pension plan, doubled their health insurance premiums while worsening plan benefits, eliminated the eight-hour day, and reduced their hourly pay by 27 percent over five years, starting with an 8 percent cut in the first year. Under Hostess’ proposal, a worker who began the contract at $16.12 an hour would earn $11.26 five years later. And on top of all that, workers were being asked to agree to the closure of 10 to 12 additional plants, without being told which ones would be closed.

In a Sept. 17 press statement after the vote, BCTGM President Hurt called it “an outrageously unfair proposal from a company that has destroyed the trust of its workers through years of mismanagement, greed and unfulfilled promises.”

With its bakers refusing to agree to those terms, Hostess asked U.S. Bankruptcy Court Judge Robert Drain for permission to impose them anyway. It’s becoming increasingly common for bankruptcy judges to rip up labor contracts that were negotiated over decades. Hostess had other contracts, for example with Cargill to purchase flour, sweeteners and wheat gluten. Can you imagine the bankruptcy judge ordering Cargill to sell its flour to Hostess at a 27 percent discount? Yet that’s what Drain, a former Wall Street lawyer, did to union workers Oct. 3 in an order allowing Hostess to unilaterally impose changes to the BCTGM’s collective bargaining agreements.

Lead-up to a strike

Weeks of brinksmanship followed. BCTGM warned that members would strike if Hostess imposed its terms, and Hostess warned that if they struck, the company would ask the court for permission to close permanently and liquidate assets.

Hostess imposed the new terms first on three bakeries that it planned to close anyway — St. Louis, Cincinnati, and Seattle. Union members held off striking, knowing it would give the company an excuse to close those plants.

But when Hostess then moved to impose terms company-wide, workers struck Nov. 9 at 24 production facilities.

“[Members] are not willing to take draconian wage and benefit cuts on top of the significant concessions they made in 2004 and give up their pension so that the Wall Street vulture capitalists in control of this company can walk away with millions of dollars,” Hurt declared in a Nov. 12 statement explaining the strike.

As one Hostess worker wrote in the online magazine Daily Kos: “It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”

Hostess announced it would move to liquidation if employees did not return to work by 5 p.m. Nov. 15. On Nov. 16, it announced closure. It’s the end of an 85-year-old bakery business with 33 bakeries, 565 distribution centers, 570 bakery outlet stores, and approximately 5,500 delivery routes — and the loss of 18,500 jobs, including those of 15,000 union members.

Seventeen of those jobs are Teamsters drivers in Portland.

On Nov. 21, Judge Drain approved the liquidation plan, and on Nov. 29, he granted a request by Hostess for $1.75 million in bonuses to 19 officers and high-level managers who are needed to facilitate the sale of the company’s assets.

Collateral damage: Workers at Hostess’ unionized competitors

Drain also relieved Hostess of its $944.2 million in withdrawal liability owed to the Bakery & Confectionery Union & Industry International Pension Fund — a decision that will harm Hostess’ unionized competitors and tens of thousands of their employees. That’s because Hostess was the biggest employer in the union’s multi-employer pension plan. Under federal law, multi-employer pension plans are still responsible for workers’ pensions when an employer goes out of business or otherwise withdraws. The federal government’s Pension Benefit Guaranty Corporation doesn’t step in with multi-employer plans unless they’re nearly insolvent. Hostess’ collapse means the Bakery Pension Fund has to trim extra benefits for 53,000 retirees and an equivalent number of active members. And it means that still-existing employers (like Franz and Kroger in the Portland area) are stuck paying a surcharge to make up for Hostess’ withdrawal. The Bakery Pension Fund was at healthy funding levels — despite the 2008 stock market downturn — until Hostess halted contributions last August. Now, under a pension rehabilitation plan that went into effect in November, employers are paying a 5 percent surcharge, which will double Jan. 1. For an employer like Franz Bakeries, the 10 percent surcharge equals 57 cents an hour per worker, said BCTGM Local 114 Financial Secretary Terry Lansing.

Parting shots

As Hostess prepares to liquidate — selling off trucks and bakeries and the right to make its famous brands — it’s revealing what management has chosen to publish on its web site. Hopes for the swift resurrection of Twinkies under a new brand owner?  Thanks to customers for 85 years of business? No, Hostess Brands Inc. uses its most valuable online real estate to take a parting shot at the union: “We are sorry to announce that Hostess Brands, Inc. has been forced by a Bakers Union strike to shut down all operations and sell all company assets.”

“Hostess management wants to blame our members for the demise of the company,” says Hurt. “The truth is that had it not been for the valiant efforts of our members over the last eight years, including accepting significant wage and benefit concessions after the first bankruptcy, this company would have gone out of business long ago.”