Hostess Brands Inc. began contingency planning for a liquidation more than a year before irate bakers went on strike, court records show.
The bankrupt snack maker has consistently said that a strike by the bakers — members of its second-largest union — pushed it into liquidation mode. The bakers have countered that the company’s woes predate the strike.
Clearly, planning for a possible liquidation predates the strike and even predates union votes in the fall on the company’s last best and final offer.
A 32-page document filed last week in Hostess’ bankruptcy case shows that in July or August 2011 the Irving, Texas-based company hired a consultant who estimated that the liquidation value of the company’s assets, on the high end, was about $522 million. The report is dated Aug. 30, 2012, and parts of it have been reported earlier.
A different consultant said in court recently that the company’s assets, including its popular brands such as Twinkies and Wonder Bread, could fetch $1 billion.
Hostess said it expects to file binding “stalking horse” bids for many of its brands in January, followed by a four-week auction process to allow competing bids. Sale closings for many brands could come as soon as mid-March, Hostess has said.
On Nov. 9, members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike, cutting production at the already cash-strapped company. A week later, Hostess asked the bankruptcy judge for permission to dismantle itself.
Company spokesman Lance Ignon said Hostess was “engaged in contingency planning, including the preparation of a liquidation analysis, months before the strike, given the uncertainty around labor negotiations.”
He said such planning is typical in situations where motions that would allow the company to avoid adhering to union contracts “are a core component of the restructuring.”
While the dissolution of Hostess may have taken Twinkie lovers by surprise, for some following the case, it had been a strong possibility for months. There were too many issues that even warmer union relations would not have changed.
Hostess was loaded with debt even after its predecessor company emerged from bankruptcy court in 2009. And it faced an even greater debt load when it entered bankruptcy court in January.
Even after the new bankruptcy case was filed, it needed a cash infusion. GE Capital, a key lender, has said repeatedly it wants its money back. No one stepped up to offer the cash needed to help the company emerge from bankruptcy protection or to fund much-needed capital improvements.
Also, consumer tastes have been changing while Hostess’ product lineup has remained largely the same.
“So many things had to break right for Hostess to successfully emerge from bankruptcy, beyond labor negotiations, that Hostess knew it made sense to plan for liquidation,” said Jeffrey Freund, general counsel to the bakers union.
Last year, Hostess selected FTI Consulting to look at potential proceeds and costs of a “forced liquidation” of the company’s assets following a worker strike, according to the court filing.
In November 2011, FTI prepared an analysis that also showed potential proceeds under an “orderly breakup” of the company through the sale of Hostess’ brands and assets as going concerns. Those sales would be followed by a liquidation of all remaining assets.
The “forced liquidation” was estimated to bring in up to $450 million, with $336 million available for distribution to those with claims, once the liquidation costs were subtracted.
An “orderly breakup” was estimated to bring in up to $521.7 million with $410 million available for distribution.
At the time of the report, the company owned 264 real estate properties totaling about 8.9 million square feet of space, including bakeries, depots, retail outlets and other property in 43 states.
Workers have complained that some of the bakeries are outdated, making them less valuable to potential buyers.