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Hostess: Challenges Facing Unions When PE Doesn’t Deliver

Eileen Appelbaum
Published: Sunday 25 November 2012
Hostess had been in trouble since the early 2000s and in bankruptcy protection since September 2004.
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If there is one thing about the Hostess failure that everyone can agree on, it’s that – in the words of Term Sheet’s Dan Primack – the bakery company’s management was ‘dunderheaded.’ When Ripplewood Holdings bought Hostess out of bankruptcy in February 2009, the company was in danger of failing. Unable to adapt to consumer demand for healthier products and slow to adopt new technologies, Hostess had been in trouble since the early 2000s and in bankruptcy protection since September 2004. As it prepared its takeover offer, Ripplewood presented itself as a hot shot private equity firm that could turn around the ailing company and save its iconic brands. Both Hostess’ largest creditors and its major unions were persuaded.

Ripplewood negotiated major concessions with the bakery company’s two major unions – the Teamsters and the Bakery Workers. Silver Point Finance and Monarch Alternative Capital, Hostess’ largest creditors, set the terms under which they would lend Ripplewood money. And Ripplewood knew the dimensions of the huge debt burden Hostess would carry as it emerged out of bankruptcy. But Ripplewood had a credible plan for saving Hostess that it believed would work – and that it sold its creditors and unions on.

For all the fanfare, Ripplewood failed miserably in implementing the turnaround and misfired badly on execution. The company was poorly managed, failed to introduce successful new products, did not invest in new equipment and technology, and faced falling demand for its products and rising debt and interest payments. Managers took steps to line their own pockets as the company grew increasingly troubled. The company cited sales revenue of $2.5 billion in 2011 as proof that demand remained strong and it had done a good job, but failed to mention that sales revenue was down 11 percent from 2008 and 28 percent from 2004.

Board oversight was especially bad – only Ripplewood and Hostess’ management had votes on the Board. Silver Point and Monarch put up the money and set the terms of the loans that enabled Ripplewood to acquire Hostess, but they didn’t hold voting positions on the Board. The unions made major concessions intended to let Ripplewood make necessary investments in new equipment and technology and get Hostess back on its feet. But they didn’t have a seat on the Board and could not meaningfully protest the poor decisions of Hostess’ management and its failure to use the funds freed up by the concessions to improve the company’s performance.

Not until August 2011, when Hostess failed to make its July payment to its workers’ pension plan and failed to make payments to its creditors on its outstanding debt, were the hedge funds and the unions able to step in. The hedge funds provided Hostess with emergency financing to stop the free fall into bankruptcy and allow time for Hostess to reorganize in Chapter 11. Hostess was back in bankruptcy protection in January 2012, just three years after its earlier exit.

Poorly managed companies – especially those with the debt burden that accompanies a leveraged buyout by a private equity owner – are likely to become an increasingly important challenge for unions. Hedge funds are increasingly buying the debt of distressed companies in a bid to exchange the debt for equity and emerge as the company’s owners in the bankruptcy proceedings. Negotiations with hedge funds and other creditors are likely to become a more common occurrence. How should unions respond?

Looking at the Hostess situation a union could conclude that negotiations over further concessions by workers to keep the company functioning were fruitless. The union could continue to bargain to try to limit concessions and stand up against the greed and mismanagement of the company’s owners and managers. It could refuse to make further concessions to a company It thinks is asking too much. If its demands on behalf of its members were rejected, it might consider striking. And it might feel it had no choice but to strike if concessions were imposed. Under these circumstances, the union might be willing to take the risk that the company would move from bankruptcy to liquidation and workers’ jobs would be lost.

Equally, a union could conclude that it makes sense to participate in negotiations over the future of the company, to investigate what it will take to continue to run the business, and to determine what further concessions it will take to get there. The union might be willing to make these concessions if it gets an equity stake in the company for its members to offset concessions and provide an upside in case the company succeeds, and if it believes that it can change the company in the future – that it can have a meaningful role in the selection of a new CEO and voting seats on the Board; and that painful as the present concessions are, the union can not only save workers’ jobs but can make a better future for them and the company.

The bankruptcy court judge has ordered Hostess and the Bakery Workers union to engage in mediation to avoid liquidation of the company before he will consider the company’s request to terminate all operations. Other private equity companies – notably Sun Capital – have come forward with an interest in buying Hostess. However this saga ends – with Hostess in liquidation, conciliation, or sale to another company – unions will continue to face a challenge when it comes to dealing with poorly run companies owned by private equity or hedge funds. A dialogue within the union community about how to deal with such challenges is urgently needed; a consensus about how to proceed, should one emerge, could provide the basis for concerted action by unions and the union movement when such challenges arise.



Or, workers intent on

Or, workers intent on striking could have a contingency plan ready to buy and run the company themselves. Unions aren't the right ones to do this, in my opinion, but certainly workers associations and coops could be formed to ensure that production--and jobs--continue. Hostess brands a coop? Why not?

Look at the bigger picture.

Look at the bigger picture. Our corporate society is inherently flawed. Things must be totally rewritten to make sanity prevail. When Reagan deregulated the Hedge Funds they went from paying three times the invested amount as payback to 30 times. The analysis of the '29 crash/Great Depression found the 3% to be a safe acceptable risk. The 30 X payout helped tank the economy in 08.

That investment companies like Goldman Sachs can invest in commodities because courts (bought or insane - you choose) decided they were basically "farmers." The fact they could do so was kept secret for about 7 years. Read Taibbe's "GRIFTOPIA" about the meltdown and how the continuation of this deregulation (again dereg screwing the people) causes inflation. In addition, GS are literally criminals who engaged in securities fraud helping cause the last crash, but never investigated. Hmmm

All the things we see here force money out of the working economy which is the place where TRUE value is increased - manufacture, building, etc. into the parasitic investment economy where no actual capital improvement is possible. It is paper profit. All these govt regulations assist herding us into paying corpseorations more and more.

These are the psychos running your country, my country. Fight them every way possible or get your tattoo, rifd chip, and stand in line to do what you're told. http://www.fastcompany.com/53247/your-boss-psychopath

Let's start looking at this

Let's start looking at this situation. We have companies going out of business because they have fools running them or worse, have bald-faced thieves in control. These CEOs scream that we (America) cannot be led into European Socialism, yet they push of pension obligations (aka promises to employees) to the Federal Government. Hmmm, this is what Socialist Europe has, government run pension systems. They scream that they cannot compete because taxes are too high. Hmmm, well not really too high. Their real complaint is that Europe and the rest of the developed world has universal care and that removes the direct cost to the company. So do these corporations really want a good old fashioned "American" system? Hell no, socialize everything save for profits.

The European Union and British Commonwealth countries are demanding that companies pay more in taxes. They are in the process of making it illegal for multi-nationals to hide in tax shelters like Ireland. We need to join this group.

In Hostess' case, I love their cupcakes but these newly minted Corp-people need to be held to the same rules human people are when it comes to bankruptcy. Can a human stand before a bankruptcy judge every other year with a new case? No. You should get 1 protected re-organization, the next time (10 years span) you stand before a bankruptcy judge it will be the last. The company will be liquidated and "owners" will in fact be relieved of any and all funds. Hide or play games, it will be prison time for fraud.

Learn from the 1910s, 1930s

Learn from the 1910s, 1930s and 1960s: When standing up doesn't get you anywhere, your choice is to rise up or shut up.

How much have the hedge

How much have the hedge funds, banks and private equity funds extracted from the company in fees, interest and dividends? This is standard in the PE playbook. Buy up distressed debt, swap for equity, own the company, extract large dividend payments, fees, etc., and then liquidate. They make money and get the liquidation value as well.

. . Another "Nation of

. . Another "Nation of Change" article - - -
>>>>>>>>>>>>>>>>>>>>>>>><<<<<<<<<<<<<<<<<<<<
"Hostess Blames Union for Bankruptcy after Tripling CEO’s Pay"

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.

At the time, creditors warned that the decision signaled an attempt to “sidestep” bankruptcy rules

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.
. . . SOUNDS LIKE George Bush's my way or the highway........

lee you described solyndra i

lee you described solyndra i did not know romney was invovled

This article, coupled with

This article, coupled with the wiki article on Hostess Brands, frames much of the details of what is wrong with laws and greed that fuel private equity gains while destroying jobs and families. No wonder we have such a widening wealth gap.

In the Hostess case, it is suggested that roughly $55Million in pension obligations will be supported via the Pension Benefit Guarantee Corporation, a U.S. Agency formed to bail out these messes using public money. So, while the Private Equity firms and company officials are feathering their nests, and the employees are losing jobs, we all get stuck paying the costs. Hmmm.

The question comes down to how to fix it. What if any company, as soon as it approaches PBGC for support, or files bankruptcy, was obligated to open all its books for full public review? And, using this great internet, our own government promptly posted all relevant documents for full public view? We could see in crisp black and white, who was making what profit off of the scheme. Every Tom, Romney, and Harry would be exposed and an appropriate public outrage could be stimulated so that these ridiculous laws would be promptly changed.

In the big picture, the answer goes (again) to the need for transparency. What if it came down to the simple idea that each person who gains money from the government had to release records fully disclosing the amount of that gain and justification for that gain? This would apply to contractors, as well as to taxpayers. What if every one of us, if we file papers to reduce our income or 'corporate' taxes, was required to produce documentation for full public disclosure? Had this been the case, Romney's income tax history would never have been at issue, as we would all know about it when he filed (conversely, we might not know about it if he chooses NOT to file, but in that case, he is leaving the money in the federal coffers).

Bottom line: there are some simple ways to clean up this mess, and they mostly all come down to TRANSPARENCY.

The law should be that any

The law should be that any "vulture capitalist" company should lose every dime they have invested in any bankruptcy. They have no reason to keep the company in business if they follow a business plan such as the one that made Romney rich. He would buy a company, borrow as much money as possible against it, then declare bankruptcy. The company would go out of business, everyone would lose their jobs and their pensions, but the vulture capitalists would keep the borrowed money.
If the law were changed so that pensions and salaries were honored first, any expenditures that would keep the company in business were paid second, and the vulture capitalists got the leftovers, the vulture capitalists would be working very hard to be sure that there were some leftovers.

As long as it's legal for

As long as it's legal for investors and upper management to make big money from running a company into the ground, the twinkies will continue to fall. There was a time in America when making a company viable and strong was the road to wealth.

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