US Tries To Wrest Control Of Hostess Liquidation As Management Seeks To Pay $1.75 Million In "Incentive" Bonuses

Tyler Durden's picture




 

The Hostess bankruptcy liquidation, the result of a bungled negotiation between the company, its equity sponsors, its striking workers, and the labor union, over what has been defined as unsustainable benefits and pension benefits, is rapidly becoming a Ding Ding farce. The latest news in what promises to be an epic Chapter 22 fight is that the judge, pressured by various impaired stakeholders, among which none other than the US trustee, is that the bankruptcy Judge Robert Drain, who has previously presided over such Chapter 11 cases as Loral, RCN, Cornerstone, Refco, Allegiance Telecom, Delphi, Coudert Brothers, Frontier Airlines and Star Tribune, has ordered the company and its unions to seek private mediation to attempt averting what the company has already said is an inevitable unwind of operations.

Per Reuters, "Hostess, its lenders and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) agreed to mediation at the urging of Bankruptcy Judge Robert Drain of the Southern District of New York, who advised against a more expensive, public hearing regarding the company's liquidation. "My desire to do this is prompted primarily by the potential loss of over 18,000 jobs as well as my belief that there is a possibility to resolve this matter," Drain said." Sadly, this latest step will almost certainly lead to nothing constructive as it merely extends a status quo which already proved to be unresolvable.

What makes a mediation improbable is that the antagonism between the feuding sides has certainly hit a level of no return:

Several unions also objected to the company's plans, saying they made "a mockery" of laws protecting collective bargaining agreements in bankruptcy. The Teamsters, which represents 7,900 Hostess workers, said the company's plan would improperly cut the ability of remaining workers to use sick days and vacation.

In the off chance that mediation does lead to a reconstruction of the failed company it may ironically benefit from the closeout sale of its products as confused Americans hoarded Twinkies, Ding Dongs and Ho Hos in hopes of selling them on Ebay as collectible items with huge marks up, something we warned previously will fail. Regardless, the firesale will lead to a surge of cash in the company's coffers, which will then lead to a scramble over how it is divided.

Then comes the question of whether or not someone steps up in the liquidation process and buys the company in part or whole. Here we learn that Grupo Bimbo, long expected to be the natural suitor for at least the firm's trademarks and IP, will not participate in said process. Hostess CEO Rayburn said Grupo Bimbo won’t be a potential buyer for the bankrupt baker. “One misconception in the market is that Bimbo would be a buyer and bakery leadership told us in several plants that Bimbo would come in and buy, which is absurd,” Rayburn said in an interview with Bloomberg Television. Rayburn cited Bimbo’s agreement with the U.S. Justice Department to sell some Sara Lee brands in order to complete its acquisition of Sara Lee’s North American bakery business. “Due to antitrust, it would never happen,” Rayburn said.

More to the point, and as we predicted on Friday, if there is an outright purchase of the company, it will be a standalone entity, without its unions: Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said. In other words, if the Union had hoped that their workers would be retained by the purchasing entity, their dreams just got shattered.

But while the Union may be sad, it is about to add another emotion to its arsenal: blind fury. Because it is here that things get truly surreal. As the US Trustee, a Justice Department official responsible for protecting creditors, disclosed, as part of the wind down of Hostess, wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation.

This is just part of the millions to be spent imminently on the wind down:

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.

 

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.

Most importantly, however, is the question how one explains to 18,500 workers who are already out and looking for jobs that the management team which was just as responsible for crushing the company deserves on average $92,000 each in "incentive bonuses, is anyone's guess and one does wonder what safety precautions said management team may have taken to protect from what is certain to be the collective wrath of its former workforce.

Naturally, the immediate outcome of this rather obscene demand, which may fly in a Chapter 11 KERP proposal but hardly is tenable in a liquidation proceeding, is that said US Trustee is now seeking to take control of the liquidation away from the company. As BBG reported earlier, "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."

But wait, it gets better: because it is quite likely that should an emboldened US Trustee get her wishes granted, will push to continue operating Hostess as a going concern, potentially with a court appointed, and US Trustee selected management team.

In essence this could result in a stealth nationalization of the junk food maker, which would preserve the jobs of the workers for the time being, but crush the balance of the capital structure, i.e., secured and unsecured creditors.

Impossible, you say? It has happened, to a big extent, before. Recall a certain bankruptcy case of one General Motors, where the claims of creditors were primed by those of the labor unions.

Granted, such a perversion of the bankruptcy process would be historic, but in a country in which everyone is to blame for everything, and in which property rights are becoming a very nebulous concept, we would certainly not be surprised if the US government ends up "bailing out" Hostess by a mandatory flipping the capital structure, over the cries of the company's creditors, further pushing the country into the twilight Banana zone.

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Mon, 11/19/2012 - 18:42 | 2997166 walküre
walküre's picture

Unit labor cost? Why do I pay a "good" lawyer $400/hour upwards? Why is my medical bill huge? Why are my prescription meds so expensive? Where is the "unit labor" cost there? That isn't the issue because Law, Health and Pharma are big lobbyists in Washington.

If you want Chinese slave labor, then give me Chinese medication prices and Chinese doctor fees. Chinese lawyer fees and so on.

Do you understand where this logic is going?

The race to the bottom has got to stop. Even if you're independently wealthy, your quality of life is directly affected by those living around you.

Mon, 11/19/2012 - 19:10 | 2997251 spastic_colon
spastic_colon's picture

i suppose you're right.....lobbyists, lawyers etc have a direct or indirect affect on total cost of goods sold, the decisions made in washington ultimately filter down to the end user, why not tack on some collectively bargained "fixed" labor cost, regardless of productivity and/or performance for good measure.  We can always recalculate core CPI and PPI so no one's the wiser.

Mon, 11/19/2012 - 19:27 | 2997298 Whoa Dammit
Whoa Dammit's picture

Just about every U.S. company is worth more without the Wall Street debt that has been added to their bottom line ever since the  late 1970's when buyouts started to become rampant. What we are seeing is the end game of that financing,wherein the government has to nationalize companies in order to keep the average citizen working (instead of rebelling). Face the truth: this problem was not caused by private sector unions. 

Mon, 11/19/2012 - 20:52 | 2997543 moroots
moroots's picture

I wonder why the time period you reference happens to be the exact same as the decision to move to a fiat monetary system.  Who's decision was that?  Oh yeah, government's.  Crazy how that works.

Mon, 11/19/2012 - 19:48 | 2997362 MachoMan
MachoMan's picture

So you think that you have to pay a lawyer that much because of lobbying?  The reason why your medical bills cost so much is because of insurance...  You can go to a shit doctor or a good doctor and they all cost a lot...  not so much with lawyers or accountants.  Individual lawyers set their own fee schedule based upon a non-insurance market (and a saturated one at that).  Medical professionals look at what the maximum insurance payment for a particular procedure is and add 50% to it to determine their fee schedules...  [this also applies regarding the "necessity" of the professions...  medical being vastly more necessary]

Mon, 11/19/2012 - 21:10 | 2997574 dark pools of soros
dark pools of soros's picture

where is the globalization of pharma??  no lobbying there right? unsafe right??  as we get fed dogshit junk food and lead candy from China

Mon, 11/19/2012 - 22:06 | 2997690 tenpanhandle
tenpanhandle's picture

I think that was junk shit dogfood.

Tue, 11/20/2012 - 01:35 | 2998006 Oldwood
Oldwood's picture

If you want to stop your race to the bottom you had better close the barn door on "free trade". We will all be working for chinese wages if we have to compete with chinese wages. Only a fool would think that we can keep wages artificially higher than the rest of the world while competing with them.The only systems that can are those that do not compete, like government employees which as a pro unionist, you believe is just great, even if they are being paid by people earning substantially less.

Mon, 11/19/2012 - 18:14 | 2997039 walküre
walküre's picture

Here is what the union should do. Seize the operating assets immediately. Move into the factories and lock management out. Negotiate the sale of products among other unions and set a new standard for "Made in America" and "Sold to Americans".

Take a chapter from the playbook of workers and unions during the Industrial Revolutions. The enemy today is just as callous as the Industrials were at that time.

If all fails, torch and pillage the operating asset to guarantee there will not be a "sale" without union participation.

Do as they do, not as they say.

Mon, 11/19/2012 - 18:24 | 2997088 gmrpeabody
gmrpeabody's picture

Another useful idiot!

Mon, 11/19/2012 - 19:05 | 2997233 Matt
Matt's picture

Here's an alternative; the unionized laborers could get together, form a company, and bid on the assets in the bankruptcy auction like everybody else. If they win, then they can collectively own the company as a co-op. Anyone who wants to work at the company, must buy in one share in the company.

You may laugh and dismiss this, but it has happened. A sawmill in my area did this, although there were a lot fewer workers involved, maybe 250. You need $10,000 to buy in to get a job there, as far as I understand.

Mon, 11/19/2012 - 21:12 | 2997578 dark pools of soros
dark pools of soros's picture

this is really the playbook that this country needs to head towards.. and also burn federal government that still protects industries like pharma from being globalized or localized

 

Mon, 11/19/2012 - 23:15 | 2997823 MeBizarro
MeBizarro's picture

US Pharma workforce is being globalized in a big way.  Just look at US large pharma headcounts or where they have been making investments in R&D, sales, and construction.  There is certainly some still moderate investment in the U.S. but you are seeing a ton in China, Brazil, and several other countries too.  

Tue, 11/20/2012 - 01:47 | 2998018 Oldwood
Oldwood's picture

Yes, own your job instead of renting it!

Mon, 11/19/2012 - 19:27 | 2997300 grunk
grunk's picture

That would create a strong investment climate.

Mon, 11/19/2012 - 19:38 | 2997334 Offthebeach
Offthebeach's picture

The market is glutted with product. Even at its price point Wonder Bread six. Sweet cakes are glutted, and not growing. You can't raise prices. You have a old going out of style product. I doubt there is any more improvements in bakery technology save total automation, but that clashes with the union.

So, no one NEEDS those bakeries or workers even if the bakeries are free and the union works for zero dollars an hour.

Taking and trashing the plants will give the company an insurance check. They'd like that. Then they can scrap the metal.

Other than that, the union has a strong hand. Maybe Obama can buy the Twinkies, send them to schools then thrown out as unhealthy. Cash for cupcakes.

Mon, 11/19/2012 - 23:46 | 2997869 Mary Wilbur
Mary Wilbur's picture

Panara's employees bake their bread daily on the premises of their restaurants.

Tue, 11/20/2012 - 01:39 | 2998012 Oldwood
Oldwood's picture

That would require them to take initiative and they are only really good at standing around holding signs and drinking coffee. You really would vote for Mao, would't you.

Tue, 11/20/2012 - 03:27 | 2998079 W T Effington
W T Effington's picture

Ohh man,   Spoiled little brats acting like spoiled little brats. I guess most of you union people really do believe all of that collectivist propoganda from the union bosses. You suggest taking your ball and going home. Nothing wrong with that except that you don't own the ball !!!! You can't win the game so you want to walk over and stick a knife in the ball so no one else can play. You literally just suggested that the union workers destroy the chance for anyone else to use those productive assets because the union isn't getting their way. The epitome of selfishness. Bitches and Hoes, man. Bitches and Hoes.

Tue, 11/20/2012 - 04:20 | 2998111 Rogue Trooper
Rogue Trooper's picture

You are late to the party.... that sounds like Syndicalism. A true workers paradise and utopia surely beckons - this time. Confederations of collectivised trade unions and industrial unions eliminating the capitalist, risk takers and the pricing mechanism democratically deciding how many iphone 5's, tractors and toilet rolls we will need - DPRK it's only a matter time.  What could possibly go wrong?

/fuckin' socialist ... they now haunt ZH

'isim's we just need less of em!

Mon, 11/19/2012 - 18:14 | 2997040 Innisfree
Innisfree's picture

I'm actually for the management receiving bonuses. It's really just beginning. Atlas has shrugged.

Mon, 11/19/2012 - 18:16 | 2997053 fonzannoon
fonzannoon's picture

Yeah I actually agree. Lets get the party started.

Mon, 11/19/2012 - 23:57 | 2997890 scaleindependent
scaleindependent's picture

Fonzanoob and Innispee

Your hate makes you into an idiot.

Let me explain. Although I agree unions should share the blame, it looks like the execs are the greedy bastards that ruined the company. In the process, they make out like bandits by giving themselves 100% or more raises while declaring bankruptcy and then after declaring bankruptcy they want a bonus or an incentive? Please...

 

What everyone here is ignoring are the creditors and shareholders of the company. Any remaining money should go to the creditors. Also, I would rather it go to the shareholders instead of the incompetent, greedy managers.

 

""While the company was filing for bankruptcy, for the second time, earlier this year, it actually tripled its CEO’s pay, and increased other executives’ compensation by as much as 80 percent. Over the past eight years since the first Hostess bankruptcy, BCTGM members have watched as money from previous concessions that was supposed to go towards capital investment, product development, plant improvement and new equipment, was squandered in executive bonuses, payouts to Wall Street investors and payments to high-priced attorneys and consultants. BCTGM members are well aware that as the company was preparing to file for bankruptcy earlier this year, the then CEO of Hostess was awarded a 300 percent raise (from approximately $750,000 to $2,550,000) and at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256." http://www.nationofchange.org/hostess-blames-union-bankruptcy-after-tripling-ceo-s-pay-1353255416 "

Tue, 11/20/2012 - 02:24 | 2998042 Kickaha
Kickaha's picture

What you describe with such indignation is common in a shaky Chapter 11 bankruptcy.  Typically most of the key personnel are not under written contract, or have some escape clause in their written contract that allows them to jump ship when the company declares itself to be insolvent.  They have talent, skill, and experience which is readily sought by other companies.  They know they have little or no future in their present jobs.  They start accepting positions with other companies, and it is very hard to find anybody to replace them, due to the likely short-term nature of the positions.  On top of that, by the time anybody new gets up to speed, the business is likely tits up.

The company will be liquidated unless new capital comes in.  The creditors are in charge of the bankruptcy, not labor, not management, not the shareholders.  The new compensation packages are presented by Motion and then heard in open Court, and the creditors approve them.  Absent the continued presence of experienced key employees, the business will not be able to continue as a going concern, and it will be impossible to attract new capital, meaning that the assets will end up been chopped up and sold piecemeal, and the creditors will get pennies on the dollar in a Chapter 7 liquidation.

If anything, blame the largest creditors for this fiasco, since, in the end, they were unable to find a way to make the business work.  Maybe the managers they put in place weren't good enough.  Maybe some of them were overpaid.  Maybe they might have found some other way to deal with the unions.  Maybe the union bosses didn't understand the gravity of the situation, and maybe the rank-and-file were dumb as bricks and only now are finding out that they have lost their jobs and must now compete with the 25% of the labor force that is out of work for whatever low-paying, marginally skilled jobs might come on the market during this depression.

Bakeries have been dropping like flies all over the USA for at least 40 years.  Better transportation and freezers turned local markets into regional and national ones, and brought hundreds of bakeries into direct competition with each other.  Only a handful will survive once an oligopoly with some pricing power gets established.

 

 

 

Tue, 11/20/2012 - 03:38 | 2998087 Angry White Dude
Angry White Dude's picture

Correct and accurate. As a bankruptcy attorney who has practiced in front of Judge Drain and the SDNY courts for 10+ years, payment of bonuses to existing management is par for the course. The logic, which is debatable, is that the assets of a company like Hostess are a "melting ice cube" and the value will evaporate if the existing management doesn't stick around to oversee the sale, which they won't do if they don't get a bonus. Basically extortion, but hey that's capitalism if you ask me. In short, the choice is stick with the people with institutional knowledge who are, all things being equal, in the best spot to execute the liquidation (and preserve value of PPE and other assets in the meantime), or else those folks walk away and a chapter 7 trustee brings in a liquidation specialist who will just run a fire sale. In theory, the devil you know will result in preserving asset value and getting higher prices.  

 

Mon, 11/19/2012 - 23:56 | 2997891 scaleindependent
scaleindependent's picture

double post

Mon, 11/19/2012 - 23:54 | 2997889 scaleindependent
scaleindependent's picture

Your hate makes you into an idiot.

Let me explain. Although I agree unions should share the blame, it looks like the execs are the greedy bastards that ruined the company. In the process, they make out like bandits by giving themselves 100% or more raises while declaring bankruptcy and then after declaring bankruptcy they want a bonus or an incentive?  Please...

 

What everyone here is ignoring are the creditors and shareholders of the company. Any remaining money should go to the creditors. Also, I would rather it go to the shareholders instead of the incompetent, greedy managers.

 

""While the company was filing for bankruptcy, for the second time, earlier this year, it actually tripled its CEO’s pay, and increased other executives’ compensation by as much as 80 percent. Over the past eight years since the first Hostess bankruptcy, BCTGM members have watched as money from previous concessions that was supposed to go towards capital investment, product development, plant improvement and new equipment, was squandered in executive bonuses, payouts to Wall Street investors and payments to high-priced attorneys and consultants. BCTGM members are well aware that as the company was preparing to file for bankruptcy earlier this year, the then CEO of Hostess was awarded a 300 percent raise (from approximately $750,000 to $2,550,000) and at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256." http://www.nationofchange.org/hostess-blames-union-bankruptcy-after-tripling-ceo-s-pay-1353255416 "

Tue, 11/20/2012 - 01:55 | 2998021 Lednbrass
Lednbrass's picture

Well, on the good side their hate has not made them such complete idiots that they say the same thing three times while trying to master something as technically complex as posting on the internet.

So at least they have that much going for them...

Tue, 11/20/2012 - 01:55 | 2998023 Oldwood
Oldwood's picture

What is their net debt? While I agree that the salaries make the executives look bad, how much did these pumped up salaries impact Hostess bottom line. I mean if they are hundreds of millions in the hole anyway they may be more like grave robbers than murdering thieves. Its very possible we have multiple bad players here. What is important is what actually was the primary driver to the financial collapse.

Tue, 11/20/2012 - 03:33 | 2998083 W T Effington
W T Effington's picture

It is not your money. You are not party to any of the relevant contracts or agreements. You should have no "say so" in what hapens. Almost no one in this country knows how to mind their own damn business. If the government gets involved and starts throwing around tax dollars then you can start complaining.

Mon, 11/19/2012 - 18:16 | 2997048 benevolous
benevolous's picture

Maybe the 18,500 laid off workers can get the $1.75 million in scheduled bonuses and wind-down and moth ball the plants and distribution themselves.

Mon, 11/19/2012 - 18:30 | 2997125 darteaus
darteaus's picture

MORE LIKE THE UNION BOSSES OF 'the 18,500 laid off workers can get the $1.75 million in scheduled bonused and wind-down and moth ball the plants and distribution themselves.'

Mon, 11/19/2012 - 22:31 | 2997730 hawk nation
hawk nation's picture

Lets review the unions books. Sorry thats not allowed by anyone including the union members or useful idiots

Mon, 11/19/2012 - 18:56 | 2997214 Being Free
Being Free's picture

They can't do that, it's not in the job description.  Sigh.

Mon, 11/19/2012 - 18:17 | 2997058 Joe_in_Indiana
Joe_in_Indiana's picture

There was a worker on CNBS today saying that the $4.00/hour taken out of their paychack to go to their pension had been waylaid and corporate kept the money.  I would like a fact check on this.

 

Mon, 11/19/2012 - 18:22 | 2997085 walküre
walküre's picture

I'm sure you'll get that /not

Corporate media owned by corporate whores reporting on corporate propaganda only.

For the money and by the money.

That is why this country needs more unions, not less. Despite what many think, the unions keep corporate management in check as best as they can. Fuck, many corporations are run into the ground by management and unions can't do anything about it.

It is time the workers take the production back. Take it back from executive losers and their shareholders.

You want Fightclub? This is where the iron meets the kneecaps.

Mon, 11/19/2012 - 18:26 | 2997104 fonzannoon
fonzannoon's picture

Do you feel the same way about the public unions?

Mon, 11/19/2012 - 18:31 | 2997129 walküre
walküre's picture

No.

Mon, 11/19/2012 - 18:33 | 2997140 fonzannoon
fonzannoon's picture

I had a feeling. That is why I did not junk you. Fair enough.

Mon, 11/19/2012 - 18:37 | 2997156 walküre
walküre's picture

Public workers are on the government teet anyway. They're paid to deliver a public service. They can leave if they want to. Production workers are a different matter. They have no representation inside the jungle of corporate exploitation.

Mon, 11/19/2012 - 19:05 | 2997239 Wannabee
Wannabee's picture

@walkurie
+1 for your passion

Mon, 11/19/2012 - 19:21 | 2997283 perchprism
perchprism's picture

 

You socialist Upton Sinclair marxist thugs make me sick.  Jungle of Corporate exploitation--gimme a break.  You think other people owe you a living.  You're just a thief.   

Mon, 11/19/2012 - 19:25 | 2997295 Harbanger
Harbanger's picture

You really believe he doesn'lt like Public unions? :)

Mon, 11/19/2012 - 23:41 | 2997863 Mary Wilbur
Mary Wilbur's picture

Absolutely.

Mon, 11/19/2012 - 18:27 | 2997117 darteaus
darteaus's picture

Don't ever, EVER go full union!

Mon, 11/19/2012 - 18:31 | 2997126 Joe_in_Indiana
Joe_in_Indiana's picture

This could be a fact check-happened in July 2011

 

http://m.dailykos.com/story/2012/11/18/1162786/-Inside-the-Hostess-Bankery

Mon, 11/19/2012 - 19:06 | 2997240 taxpayer102
taxpayer102's picture

 

@Joe_in_Indiana

'Inside-the-Hostess-Bakery' union guy said "Remember how I said I made $48,000 in 2005 and $34,000 last year? I would make $25,000 in 5 years if I took their offer."  Hostess corporate management and shareholders will get their money from the court arranged bankruptcy liquidation.   The union guy citing his family's long working history at Hostess clearly describes the progression from middle-class to eventually making a wage of $11.26 an hour, not something reported by corporate media.  

Tue, 11/20/2012 - 02:47 | 2998056 Kickaha
Kickaha's picture

In a typical liquidation, nobody beyond the post-filing date lenders and secured creditors will get anything.  Given that with Hostess, there had been a recent, earlier filing, with private capital taking over, maybe the high priority classes might be a lot smaller, so maybe private capital might get some percentage of their earlier investment back.  They certainly would have wiped out most of the old creditors and old equity, and took the position of first secured creditor as to all company assets before putting up the new capital that kept the company in business the first time through Chapter 11.  But they are still going to lose tens of millions of dollars.

Your post reflects the main reason that labor unions are failing our nation as institutions.  They appear to be incapable of handling eras of excess labor and declining prices for labor.  There is nothing inherently wrong with earning $11.26 per hour if that is the maximum price for that sort of occupation.

What is grotesquely wrong is pretending otherwise, and having 25% of our working age population doing no work whatsoever as a result.

Mon, 11/19/2012 - 19:16 | 2997269 Opinionated Ass
Opinionated Ass's picture

I've got a crazy idea for you Walkure: how about not initiating violence? How about respecting private property rights?

 

How about this super crazy one: if you don't like your job, quit and look for another one, or start your own bakery?

Mon, 11/19/2012 - 19:38 | 2997333 NotApplicable
NotApplicable's picture

It seems the only logic people understand when discussing gang warfare is the need for a bigger gang.

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