Bidders Line Up for Hostess

The Wonderbread and Twinkie maker has choices to make as its auctions approach in February and March

Beleaguered Hostess Brands Inc. is headed to a highly-anticipated auction on Feb. 28, for its Wonder and other primary bread brands, with Flowers Foods Inc. in place as the lead bidder. Hostess is also headed to a March 13 auction for beloved Twinkies, with private equity firms Apollo Global Management LLC (NYSE: APO) and C. Dean Metropoulos & Co. in place as lead bidders. Auctions for Drakes, which makes the coffee cakes once featured on "Seinfeld," with McKee Foods Corp. as the lead bidder, and the secondary bread assets, with Mountain States Bakers LLC as lead bidder, will take place on March 15. It took several years and multiple bankruptcy cases for Hostess to reach a point where it would finally sell.

As Hostess gears up for the auctions, we take a look back on the company's bankruptcy case, and what led the legendary snack maker to the point where it had to split up an empire, sell businesses and wind down operations.

When Hostess filed for Chapter 11 bankruptcy protection on Jan. 11, 2012 in the U.S. Bankruptcy Court for the Southern District of New York, the company had devised a turnaround plan that, among other things, would modify collective bargaining agreements (CBAs) with its workers.

Hostess was left with financial pressures, including an inefficient operating structure in addition to the CBAs, from a bankruptcy case that it exited from in 2009. The organizational structure, built up over years of acquisitions, had remained in place since before it sought bankruptcy protection the first time in 2004.

Hostess was formed as Schulze Baking Co. in 1927 and became Interstate Bakeries Corp. after a merger with Western Bakers Ltd. in 1937. The company made multiple acquisitions, but failed to integrate and streamline its new assets well.

It sought bankruptcy in the U.S. Bankruptcy Court for the Western District of Missouri in 2004 because of the cost burdens related to its 54 bakeries, more than 1000 distribution centers and 1,200 bakery outlets across the country. At the time of its 2012 bankruptcy filing, Hostess operated 36 bakeries, 565 distribution centers, 5,500 delivery routes and 570 outlet stores in the U.S.

When Hostess moved on from the initial bankruptcy case in 2009, the organizational structure, including the CBAs, stayed in place. After it exited from its previous bankruptcy case, Hostess' financial performance didn't keep up with the projections set forth in the reorganization plan. The company experienced losses of $138 million in 2010 and $341 million in 2011.

When Hostess sought bankruptcy protection, it said in court papers that as a result of industry consolidation, its competitors were expanding their market reach. It also said many of its competitors didn't have unionized employees. When it went into bankruptcy in 2012, Hostess had 372 separate CBAs that mandated maintenance of 80 different health and welfare benefits plans, increases in wages and benefits and specific work rules.

For example, if Hostess needed to provide both bread and cake products to one location, depending on the route, the CBAs mandated that separate trucks deliver the products, that products must be loaded into the trucks by a separate person than the driver, and that a separate employee needed to move products from the back room to the shelf.

In court documents, Hostess says the most expensive part of its operating costs were its obligations under the CBAs, which covered about 15,000 employees. Hostess asked the court in a Jan. 25, 2012 motion to reject the CBAs, beginning the turmoil that led the company to cease operations.

Hostess' chief executive, Brian Driscoll, said in an affidavit filed with the bankruptcy court, that Hostess' long-term viability depended upon the debtor's ability to achieve dramatic change to its labor agreements, as well as reduce its cost structure, legacy pension and medical obligations and recapitalize its capital structure, which it planned to do in Chapter 11.

Eventually, Hostess was able to modify CBAs with each of its unions. But after starting to implement those changes in October, it received strike notices from the unions. Thousands of workers formed picket lines outside of Hostess' bakeries starting in November, according to court documents. Those strikes caused Hostess to lose between $7.5 million and $9.5 million, according to court papers. In response, Hostess filed a motion to wind down.