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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NotApplicable's picture

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

Let's see...

At a local bakery, the bakers are scared to death of "their" union (or I should say were). They had to sneak into HR to clarify the lies told to them by their union rep. The big lie was that Hostess would fire them if they crossed a picket line to come to work. NONE of them wanted to strike.

Workers are gonna have to take production back from the unions as well, as they are just another gang providing the service of protection, whether you want it or not.

WAMO556's picture

I have lead to take on your iron. Pretty sure I already know the outcome. Most union workers I know have this nasty sense of entitlement that is closely akin to the fanatism of the social security entitlement types. It ain't your money.

W T Effington's picture

"Take back production"? In order to do that the union workers would have needed to actually be in control of production in the first place. That would unfortunately mean they would need to take some risk for themselves and go into business. I understand the union support though. It is always easier to take rather than produce. The state aparatus which the unions leverage to their benfit is the great myth where men try to live at the expense of everyone else. This includes unions and the corporatacracy.

Sands8oo's picture

Government Ding Dongs bitchez!

A Lunatic's picture

Hostess is too big to fail........

Debt-Penitent's picture

The Hostess with the Absolute Mostess. They don'ty call him Uncle Sugar for nothing!

 

Too bad the Fed can't print Twinkies.  They'd be right on it!

RobD's picture

Mmmm Obama likes him some ding dongs or Obama Twinkies, better trade mark that lol.

LMAOLORI's picture

 

 

Obama is a ding dong and it looks like MOO chelle's the one who really loves the twinkies

lindaamick's picture

The same thing happened when Nortel went into bankruptcy.

The execs that stayed paid themselves bonuses for "reducing staff as planned".

This went on for a long time.

darteaus's picture

And the incentives were in place FOR A LONG TIME, in order for the company to keep managers from running off to other companies while the company is trying to negotiate, and that's good business.

darteaus's picture

Of course it will reopen w/o the unions - if it reopens at all.

Why would anyone hire the guys that forced the last owners out of business?

SloMoe's picture

Too big to flail? Not in America...

Frank N. Beans's picture

all this for a twinkie?!  wtf

 

walküre's picture

18,500 workers is a big deal in America

those are affected directly

Hangfire's picture

Who cares about Hostess, when Kool-Aid is on the brink then you will really see the current administration go into panic mode!   

Jack Burton's picture

How are you going to attract the top flight management talent if you do not reward their skill, talent and hard work with incentive bonuses? Clearly the management team is key to Hostesses performance, the top flight management deserves to be compensated for their performance. WOrkers are a dime a dozen and unskilled, any moneky could work there, while the management team is comprised of the best and the brightest with skill sets the company is in desperate need of.

If you want a bonus, work hard and become a skilled manager, the workers are just more unskilled liberal "takers", they ruined the company by their lazy and slovenly work and their demands for undeserved pay and benefits. Unskilled people like these bakers are what has ruined America.

Management bonuses are how companies get the talent that drives the success of American business. Unions try and tear down these successful vital managers out of greed and stupidity. They are the 47%.

Matt's picture

This almost reads as satire. " Clearly the management team is key to Hostesses performance, the top flight management deserves to be compensated for their performance" 

Because negative profits is a sure sign of performance, right? Their bonuses should be for negative amounts of money when the company runs a deficit.

Clycntct's picture

Matt what is this thing you call "almost"?

It either a question or an effect of to many twinkies.

Jack Burton's picture

My post is so outrageous it has to be satire. But clearly many would agree with just what I posted. The American workers are lazy, overpaid and greedy. Better send the jobs to China where American companies can get the kind of workforce that management needs to boost profits and pad the bonus pool.

MeBizarro's picture

Or workers simply can't organize or collectively bargain outside of the approved labor unions by the local or provinical or national Communist Party officials or risk all kind of threats and possibility of extended jail time or risk possibility of death.  

TruthHunter's picture

"Clearly the management team is key to Hostesses performance"

 

Ha ha! great sarcasm, but you were probably serious.

BTW, if you are looking for someone to blame, don't forget Walmart.  They have put the 

squeeze on everybodies' distribution setups. Little Debbie has tried to protect their Independent

distributors and as a result, has had to contend with "Mrs Freshley" knockoffs.

MeBizarro's picture

If I ever went insane, the location of Walmarts data centers would be the first location I would work to sabotage.  Everybody yells about finance and associated industries but I can't think of a company that I despise more than Walmart or that has ultimately done more harm to the US and its economy.   Yeah, we can get cheap durable goods of low-quality that forces us to throw them out and replace them.   Whoopee.  

In the interim, it has played a whole roll in hollowing out small-town/medium-town locally-owned businesses, placed huge cost pressures on industries that encourages huge consolidation to a degree in a market place or moving production overseas, has routinely violated all kinds of labor laws, poor wages and benefits, and has only changed some of its labor practices when it is has been embarrassed nationally/class-action lawsuits/threatened with gov't action of some kind.   

Oldwood's picture

Why do you blame walmart. Its not like they forced people to buy from them. The problem is us. I worked in the car dealership industry back in the 70's and everyone was screaming about how the Japanese were killing our auto industry, but yet Americans just kept buying them Toyotas. At what point will we ever be responsible for "us"? Everything is about the bankers or the government or somebody tricking us or taking advantage of our stupidity. We have always had choice, just not the choices we liked. We always go for the too good to be true and then are totally SHOCKED. All of this mess is from that same attitude. We know whats happening, we just want to ignore reality and just do what feels good and then try to figure out who to blame with it all goes to shit.

Waterfallsparkles's picture

To the Union Workers.  Let them eat cake.

pragmatic hobo's picture

another case of union busting.

azengrcat's picture

Gas guzzler GM bailed out.  Junk food manufacturer bailed out.  What economically destructive enterprise is up next in line to raid my wallet?  

Matt's picture

You failed to voluntarily purchase their products, so now your money will be taken forcibly and used to keep them running. So, you lose that money either way, except if you didn't choose to "enjoy" the product, then you still pay and go without.

You see? This is really all your fault for making poor choices in your purchasing habits that were not in line with the best interests of society as a whole. You should have known better. Shame on you.

Seasmoke's picture

union thugs vs. greedy management.....i always struggle with who i root for......

BraveSirRobin's picture

Why don't we give the union thugs and management big sticks, lock them in a chain-link cage and let them work it out. We can pay-per view it and apply the proceeds to pay off the national debt.

Big Ben's picture

$1.75 Million in bonuses is certainly a "sweet deal" for management. Imagine what they would have gotten if the company had actually been profitable.

Long, long ago companies belonged to their stockholders. Now they belong to their management and the shareholders are really bagholders.  It would not surprise me if the managers teamed up with some outside investors, bought the trademarks and resumed operations in a right-to-work state.

Matt's picture

Is this due to individuals and ETFs holding the shares, so they cannot get together and control the Board of Directors? Is the collapse in mutual funds and other large funds part of the problem? Not enough shareholder activism due to lack of concentrated interest in companies?

Angry White Dude's picture

Shareholders get wiped out in almost all bankruptcies, unless the company is or may be solvent, which Hostess clearly ain't. Shareholders get fuckall say in the process. Rather, the US Trustee appoints an official creditors committee made up of unsecured creditors.

williambanzai7's picture

I don't know why they call them bonuses anymore. Either they achieved what they were supposed to achieve, I.e., bankruptcy, or bonus means jackpot.

blunderdog's picture

It makes no sense for the corrupt and incompetent "management" that already sank the company to continue to be paid to dismantle it. 

The shareholders should replace the Execs immediately with a new team that would AT LEAST have a sincere interest in determining what went wrong before designing any kind of incentive structure.  It *could* actually make more sense for the workers to receive the incentives.  Po'folk will work pretty hard when they know they've got to save up a few bucks before an indefinite period of unemployment.  I doubt the same is true of the Exec team.

nmewn's picture

My thoughts on this whole debacle were, if they are asking for a 10% reduction in pay (and they did) they (management) should take a 10% hit as well.

Both would be getting some of it back over time, per the agreement, except at the end of the the time period they would both be out a net 3%...that is, lower pay than now.

Also of consideration, management offered the workers 25% of the company in the negotiations, it never happened because one of the unions called a strike...the other unions of course, honored the strike and didn't cross the bakers picket lines.

Chapter 7 ensued...everyone got "cream" on their face in this one.

blunderdog's picture

Unions are just companies, same as any other--all the same corruption risks are as likely in a union organization as in a non-union organization. 

That said, if the workers are *PREVENTED* from any kind of collective bargaining with management, they don't have a prayer against the owners of the company.  The owners get to eat whether the production line is turning out thingmajigs or not. That can't always be said for the line-workers.

nmewn's picture

I think we finally agree on something.

My objection has always been, if management/owner is going to say we need X from the worker in order to make it work, they should be willing to give up X themselves.

The owners need to have their return on investment, I think everyone agrees with this or there is no reason to put their savings at risk in the first place, giving a need for jobs.

I was instantly reminded of American Airlines? where owner/management said to employees take this cut and we'll be ok...then rewarded themselves with bonuses...at the same time holding the view that labor and benefits (normally) is the largest outlay of any company.

There is a balance.

RockyRacoon's picture

A little skin in the game is always good... as long as they keep it out of the dough mixers.

Downtoolong's picture

the collective wrath of its former workforce

We already know that Twinkies have a natural half-life greater than Strontium 90.  Now we may get to find out if they are impervious to incineration.

Cardinal Fang's picture

Mickey Mouse White Gloves    $  10.00

Cufflinks                              $ 125.00 

Wrinkled White Shirts            $   75.00

5 O'clock Shadow                  $     Free

Union Scale to Look

Frumpy and Hold Pic             $ Priceless

Downtoolong's picture

I can’t quite put my finger on it,  but, there is something absurdly appropriate about our government taking over the Twinkie business. Maybe they have finally found their true calling.

dogbreath's picture

this is the company that makes wonder bread.  good riddance

krispkritter's picture

As in 'I Wonder if it's bread?'...Guy in Maintenance that I used to work with said the Hostess factories he worked in were dumps. They spent everything on salaries and management and the equipment was held together with duct tape and paper clips. And he said he never ate the products even though they gave it to employees, because the lines were so full of crap and contaminants that he'd never feed it to his family. 

willwork4food's picture

It builds (some) bodies 12 ways!*

 

*management only

Mary Wilbur's picture

When I was a kid we called it balloon bread. My mother refused to buy it. She put a chocolate cupcake in my lunch when I was in the first or second grade. I took a bite into it and bit on a chunk of metal. Needless to say I have never eaten any of Hostess's plastic food again.

Almost Solvent's picture

Tyler making reference to GM/Chrysler BK:

 

Here's a clue for the novices in the room: It's called politics, you fucking morons. Stop being such a bunch of whiny pansies.

 

In retrospect, perhaps that wasn't the best of plans. It's hard to win a gun fight when all you bring is a penknife.

In the following days, the lenders began to realize their leverage was small and dwindling. Only the government had the ability or willingness to finance a bankruptcy reorganization of Chrysler, while also supporting its warranties and suppliers and recapitalizing Chrysler Financial. None of the lenders, some of which had consumer operations in the Midwest near Chrysler plants, had any desire to take over and liquidate the company.

Anyway, we all know the outcome. The large secured lenders folded, smaller dissident creditors balked, and the Administration threw the company into bankruptcy court, where a judge was charged with dividing the baby. As soon as the dissidents saw there were enough votes among the capitulating creditors to cram down the government's restructuring plan, and the judge was not inclined to block it, they threw in their cards and walked away. No matter what their ideological attitudes were, I think they eventually realized the fiduciary duty they defended so loudly in the press could come back to bite them if they continued to waste their investors' money in fruitless battle.

http://epicureandealmaker.blogspot.com/2009/05/more-of-kickin-sitcheyation.html

goodrich4bk's picture

Yes its politics.  And when the votes are tallied in Chapter 11, it's both a democracy and oligarchy: two thirds in dollar amount and more than one-half in number.

The people who believe the Chrysler or GM bankruptcies were "thuggish" or "under-handed" don't know squat about Chapter 11.

Waterfallsparkles's picture

All of those Union Workers really screwed themselves.  Now their Pensions will be cut in half when they are put into the default Pension fund.  Plus, now they do not have Jobs.  Just how many Bakers do we need?  Mexicans can do it cheeper.

Serves them right.

The Alarmist's picture

PBGC maximum guarantee is something like $56K, so most of the rank and file will be able to scrape by.