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Hostess Judge Revives ‘Liquidation Scenario’ After Talks

By Dawn McCarty and Phil Milford
November 21, 2012 2:11 PM EST 91 Comments
A delivery at a Hostess outlet in Peoria, Illinois.
Photographer: Daniel Acker/Bloomberg
A delivery at a Hostess outlet in Peoria, Illinois.

Hostess Brands Inc. must consider a “liquidation scenario” after mediation with its bakers’ union failed to avert a shutdown that may eliminate more than 18,000 jobs, the judge overseeing the Twinkie maker’s bankruptcy said.

Chief Executive Officer Gregory Rayburn told U.S. Bankruptcy Judge Robert Drain that 15,000 Hostess workers will be fired today to allow them to start collecting unemployment benefits. The company is seeking Drain’s permission to close so it can begin asset sales that a financial adviser estimated may yield about $1 billion.

There is “very intense” competition for Hostess’s brands, Joshua Scherer of Perella Weinberg Partners LP told Drain at a hearing in White Plains, New York. A sale would be a “once in a lifetime opportunity for our competitors to get iconic brands,” he said. The 82-year-old company makes Wonder bread, Hostess CupCakes, Ding Dongs, Ho Hos and Drake’s Devil Dogs.

Most of the wind-down would take place in the first three months, a Hostess lawyer said. The initial focus would be on “selling assets to continue as a going concern,” followed by an open auction, Heather Lennox of Jones Day told Drain.

Quick asset sales may preserve some jobs, Scherer said. A prospective buyer visited a Drake’s cake factory yesterday and asked whether its acquirer “could rehire employees who worked here,” he said.

Hostess Firings

Rayburn asked Drain to shield company officials from lawsuits over today’s planned firings. Hostess has said more than 3,000 employees will stay on temporarily to clean plants and mothball equipment.

Drain didn’t immediately rule on a request by U.S. Trustee Tracy Hope Davis to convert the Hostess case to a Chapter 7 liquidation from Chapter 11, which would hand control over the asset sales to a trustee.

Company officials argued that a trustee would “take time to get up to speed” while the assets’ values declined. Drain asked the U.S. Trustee’s office, an arm of the Justice Department that oversees bankruptcies, to search for a person who might be able to supervise a Chapter 7 liquidation.

Drain adjourned the hearing two days ago and sent the parties off for a last-ditch effort to negotiate terms that might keep the floundering company afloat. Hostess said it was forced to opt for liquidation after the bakers’ union went on strike Nov. 9. The union, representing about 5,000 Hostess workers, walked out after Drain imposed contract concessions opposed by 92 percent of the union’s members.

‘Last Chance’

“I’m giving the union as well as the debtors and their lenders a last chance to try and work those issues out in private,” Drain said Nov. 19. He cited “serious questions as to the logic behind the decision” to strike.

Hostess, based in Irving, Texas, and the union agreed to Drain’s request to enter confidential mediation under his supervision. Company and union officials acted in good faith in yesterday’s talks at the law offices of Jones Day in New York, Drain said today.

“A mediation today with the Bakery, Confectionary, Tobacco and Grain Millers Union was unsuccessful,” Hostess said yesterday in a statement.

Corrina Christensen, a spokeswoman for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, didn’t return a call seeking comment on the failed mediation.

‘Tragic Outcome’

“Unfortunately, the last-minute mediation efforts by Judge Drain were not successful,” Ken Hall, general secretary- treasurer of the Teamsters union that represents Hostess drivers, said in a statement. “This is a tragic outcome.”

Hostess is asking the judge for approval to shut down 36 bakeries, 242 depots, 216 retail stores, and 311 hybrid depot- store facilities, according to court filings. There are 58 other leased or owned sites used for storage, warehousing of products or parking. The plants are in 22 states, stretching from Alaska to New Jersey.

Hostess sought court protection in January, its second time in bankruptcy, listing assets of $982 million and debt of $1.43 billion.

The case is In re Hostess Brands Inc., 12-22052, U.S. Bankruptcy Court, Southern District of New York (White Plains).

To contact the reporters on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net; Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; John Pickering at jpickering@bloomberg.net

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