DealBook: Judge Approves Sale of Rights to Hostess Brands, Including Twinkies

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A federal bankruptcy judge on Tuesday approved the sales of several major Hostess Brands product lines, including Twinkies, fetching about $800 million for the various pieces of the bankrupt baking company and clearing the way for it to be eventually wound down.

Chief among the deals cleared was the $410 million sale of Hostess’s snack cake brands, including Twinkies and Ho Hos, to Apollo Global Management and Metropoulos & Company. That transaction could lead to the return of the cream-filled treats to store shelves as soon as this summer.

Also approved were the sales of most of Hostess’s bread brands, including Wonder Bread, to Flowers Foods for about $360 million. Grupo Bimbo of Mexico won control of the Beefsteak bread line for $31.9 million after beating Flowers in an auction.

No rival bidders emerged for the snack cakes or the other bread products.

Judge Robert D. Drain of the Federal Bankruptcy Court for the Southern District of New York gave swift approval of the sales, before moving onto more prosaic matters like the review of fee payments to Hostess advisers.

Hostess is also set to sell its Drakes line of snack cakes to McKee Foods, which bid $27.5 million.

DealBook: Judge Approves Hostess Brands' Plan to Close Down

David Pardo/Daily Press, via Associated PressThe doors shut on a Hostess Bakery outlet store in Victorville, Calif., last week.

A federal bankruptcy judge on Wednesday approved plans for Hostess Brands to wind down its operations, but there is little doubt that its best-known brand, Twinkies, will live on.

The company, whose corporate ancestors go back 82 years, said it would put Twinkies on the auction block, along with its other famous brands, including Ho Hos, Sno Balls, Ring Dings and Wonder Bread.

In granting the motion by Hostess, Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York said it was important to have a quick and orderly shutdown of the company to prevent the deterioration of its factories and assets.

The company’s chief executive, Gregory F. Rayburn, testified in court that he needed to lay off 15,000 of his 18,500 employees on Wednesday afternoon so that they could begin applying for unemployment benefits as soon as possible. He said such speed was necessary for maximizing the remaining value of the company.

“From this point forward, I need two things to happen,” Mr. Rayburn told the judge. “I need to maximize the value of the estate, and I need to do the best thing for the employees.”

Wednesday’s hearing came after a last-ditch mediation session on Tuesday between Hostess and its bakery workers union. After several hours of talks, the mediation efforts collapsed.

Hostess announced its intention to liquidate last Friday, and since then the company has received expressions of interest for its bakery brands from a wide range of potential buyers. Without naming names, an investment banker for Hostess, Joshua S. Scherer of Perella Weinberg Partners, said in court on Wednesday that they included regional bakeries, national competitors and retail customers along the lines of Wal-Mart Stores and Kroger.

Mr. Scherer added that his firm had plans to contact around 145 financial firms, including private equity shops and liquidators, to gauge their interest.

Investment concerns like Sun Capital Partners and C. Dean Metropoulos & Company, the owner of Pabst Blue Ribbon beer, have already said that they are interested in buying some or all of Hostess’s remains. Sun Capital has said that it would like to buy all of Hostess, not just its brands, hoping to preserve the company and improve its often-tense relations with its unions.

Mr. Scherer said that he expected asset sales to reap “significant values,” perhaps more than $1 billion. Hostess had revenue of $2.5 billion in fiscal 2012, and a net loss of $1.1 billion.

Its famous brands have been sold and traded for decades among companies, including I.T.T., Ralston Purina and Continental Baking.

“These products will surely live on in one form or the other — because these brands are about as indestructible as Hostess’s baked goods are,” said Jeffrey A. Sonnenfeld, senior associate dean for executive programs at the Yale School of Management.

Hostess was unable to resuscitate itself during this bankruptcy, its second in less than a decade. When it filed for bankruptcy last January, it had nearly $1 billion in debt as well as labor costs and work rules that it insisted were unsustainable.

According to Mr. Raymond, what sent the company into bankruptcy was both the refusal of one of its largest unions, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, to accept far-reaching concessions and a strike that the union began on Nov. 9, crippling two-thirds of the company’s 33 bakeries.

The bakery workers union, with 5,600 workers at Hostess, repeatedly said that it saw no reason to grant a new round of givebacks — after having granted major concessions in the previous bankruptcy of Hostess — because it was convinced that Hostess was heading toward liquidation, with or without concessions. That union and Hostess’s other major union, the Teamsters, repeatedly asserted that the company was mismanaged, having had six different chief executives since 2002. The unions maintained that Hostess’s top management had done little to modernize the company’s aging bakeries or its sugary product offerings — in an era when the nation has grown increasingly health conscious.

After filing for bankruptcy protection in January, Hostess demanded lower-cost contracts from the Teamsters, whose workers at Hostess average about $20 an hour, and the bakery workers, who average about $16. To help the company survive, the Teamsters, with 6,700 members at Hostess, most of them drivers, reluctantly agreed to a contract with numerous concessions. They include new work rules, an immediate 8 percent pay cut, a 17 percent reduction in Hostess’s contribution toward health coverage and a suspension of its pension payments until 2015. In return, the company agreed to give its unions two of the nine seats on its board and a 25 percent stake in the company.

But the bakery workers’ union resisted a similar deal, convinced it would drive down wages in the industry while in no way guaranteeing Hostess’s survival. That union went on strike rather than accept that offer, hoping the company would bend.

A week after the strike began, Mr. Rayburn said he would liquidate the company.

The looming liquidation of Hostess has been a topic of debate, with many on one side criticizing greedy, stubborn labor unions and many on the other blaming what the bakery workers’ president has called “vulture capitalists.” The company entered its first bankruptcy in 2004 with $450 million in debt, and exited five years later with even more debt — $670 million.

“The private equity owners put this thing in such deep debt and asked for such deep concessions that it put the unions in a difficult situation,” said Thomas A. Kochan, a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “The unions weren’t sure whether these concessions would be enough to salvage the company.”

Hostess Brands has corporate roots going back to 1930, but the company has had that name only since 2009, when Ripplewood Holdings, the private equity firm that took control of Interstate Bakeries, renamed it. Ripplewood, which has close ties to Richard A. Gephardt, a former Democratic House majority leader and longtime ally of labor unions, is rarely viewed as a predatory private equity company — it originally bought Hostess as part of an effort to save distressed unionized companies.

“The company had plenty of time to figure out a new business model in terms of products, but it didn’t, so it was convenient to blame labor for the company’s failure,” said John W. Budd, a professor of industrial relations at the Carlson School of Management at the University of Minnesota. “Hostess’s creditors weren’t willing to make any more concessions, so if they didn’t see a viable business model, that raises questions of why labor should be making more concessions.”

DealBook: As Labor Talks Collapse, Hostess Turns Out Lights

What might be the last Twinkie in America — at least for a while — rolled off a factory line Friday morning. It was just like the millions that had come before it, golden, cream-filled empty calories, a monument to classic American junk food.

But it is likely to be the last under the current management. After not one but two bankruptcies, Hostess Brands, the beleaguered purveyor of Twinkies, Ho Hos, Sno Balls and Wonder bread, announced plans to wind down operations and sell off its brands.

Since filing for Chapter 11 bankruptcy protection in January, Hostess has been trying to renegotiate its labor contracts in a bid to cut costs. But the talks fell apart, and last week one union went on strike.

The so-called liquidation will probably spell the end of Hostess, an 82-year-old company that has endured wars, countless diet fads and even an earlier Chapter 11 filing. Although the company could theoretically negotiate a last-minute deal with the union, Hostess is moving to shut factories and lay off a large majority of its 18,500 employees.

But Twinkies and the other well-known brands could eventually find new life under a different owner. As part of the process, Hostess is looking to auction off its assets, and suitors could find value in the portfolio.

“The potential loss of iconic brands is difficult,” said the company’s chief executive, Gregory F. Rayburn. “But it’s overshadowed by the 18,500 families that are out of work.”

The company’s current problems stem, in part, from the legacy of its past.

An amalgam of brands and businesses, the company has evolved over the years through acquisitions. In the 1960s and 1970s, the company, then called Interstate, bought more than a dozen regional bakeries scattered across the country. A couple of decades later, it paid $330 million for the Continental Baking Company, picking up a portfolio of brands like Wonder and Hostess.

As the national appetite for junk food waned, the company fell on hard times, struggling against rising labor and commodity costs. In 2004, it filed for bankruptcy for the first time.

Five years later, the company emerged from Chapter 11 as Hostess Brands, so named after its most prominent division. With America’s new health-conscious attitude, it sought to reshape the business to changing times, introducing new products like 100-calorie Twinkie Bites.

But the new private equity backers loaded the company with debt, making it difficult to invest in new equipment. Earlier this year, Hostess had more than $860 million of debt.

The labor costs, too, proved insurmountable, a situation that has been complicated by years of deal-making. The bulk of the work force belongs to 12 unions, including the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

The combination of debt and labor costs has hurt profits. The company posted revenue of $2.5 billion in the fiscal year 2011, the last available data. But it reported a net loss of $341 million.

With profits eroding, the company filed for Chapter 11 in January. It originally hoped to reorganize its finances, seeking lower labor costs, including an immediate 8 percent pay cut.

The negotiations have been contentious.

The Teamsters, which has 6,700 members at Hostess, said it played an instrumental role in ousting Hostess’s previous chief executive, Brian J. Driscoll, this year after the board tripled his compensation to $2.55 million. The union also hired a financial consultant, Harry J. Wilson, who had worked on the General Motors restructuring.

While highly critical of management missteps, the Teamsters agreed in September to major concessions, including cuts in wages and company contributions to health care. As part of the deal, the union was to receive a 25 percent share of the company’s stock and a $100 million claim in bankruptcy.

“The objective was to preserve jobs,” said Ken Hall, the Teamsters’ general secretary-treasurer. “When you have a company that’s in the financial situation that Hostess is, it’s just not possible to maintain everything you have.”

But Hostess reached an impasse with the bakery union. Frank Hurt, the union’s president, seemed to lose patience with Hostess’s management, upset that it was in bankruptcy for the second time despite $100 million in labor concessions. He saw little promise that management would turn things around.

“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years,” said Mr. Hurt. “They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and ‘restructuring specialists’ walk away with untold millions of dollars.”

About a month ago, Mr. Rayburn said, the bakers union stopped returning the company’s phone calls altogether. For its part, the bakery union said the company had taken an overly aggressive approach. David Durkee, the union’s secretary-treasurer, said Hostess had given an ultimatum. “They said, ‘If you do not ratify this, we are going to liquidate based on your vote.’ ”

With the company standing firm, the bakery union struck last week, affecting nearly two-thirds of the company’s factories across the country. The Teamsters drivers honored the picket line, further shutting down the operations. The company gave union members until 5 p.m. on Thursday to return to work.

Mr. Rayburn said the financial strain of the strike was too much for the company, which had already reached the limits of its bankruptcy financing. Over the last week, Hostess lost tens of millions of dollars as many customers’ orders went unfilled. And its lenders would not open their wallets one more time.

By Thursday morning, Hostess’s executives were ensconced in the company’s headquarters in Irving, Tex., still hoping that enough employees would return to work to resume production. A small number of workers had already crossed the picket lines that had sprung up at most of the baker’s factories, but more than 10 plants remained well below their necessary capacity.

Mr. Rayburn’s deadline of 5 p.m. passed without either side backing down. Soon after, executives asked the company’s legal advisers to finish the court motions that would begin the liquidation. Papers had been drawn up well before that afternoon.

Around 7 p.m., Mr. Rayburn had his final discussions with the company’s board and his senior managers and made the call to begin winding down.

“We were trying to focus on where people were having success, but I had to make a call,” Mr. Rayburn said.