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Hostess Moves to Liquidate as U.S. Seeks Trustee Control

Nov. 19 (Bloomberg) -- Hostess Brands Inc., the bankrupt baker of Twinkies and Wonder bread, is seeking permission to pay bonuses to key managers while closing operations that will leave most of its 18,500 workers unemployed as it begins a liquidation that may attract bids from private-equity firms and rivals.

U.S. Bankruptcy Judge Robert Drain is to consider Hostess’s request to close its distribution centers and 36 bakeries at a hearing today in White Plains, New York. Hostess said Nov. 16 that it would shut down, claiming that a weeklong strike by its bakers’ union forced liquidation. The union blamed management’s concession demands, while some employees blamed both sides.

The U.S. trustee, a Justice Department official responsible for protecting creditors, today asked Drain to take control of the liquidation away from the company. U.S. Trustee Tracy Hope Davis asked the judge to convert the case to a Chapter 7 from Chapter 11 bankruptcy, based partly on the company’s intent to pay bonuses, and appoint a trustee to supervise the wind-down.

Hostess officials “have not demonstrated that the insider bonuses are permissible,” Davis wrote in a court filing.

In seeking court permission for its demise, Hostess said it wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation. Hostess is asking the judge to approve its plan -- which would result in the firing of thousands of employees -- 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.

‘Intensive’ Planning

The process requires “intensive” planning, staffing and funding, the company said. A fire-sale liquidation would damage equipment and result in improper disposal of waste materials.

It’s “not a simple matter of turning off the lights and shutting the doors,” Hostess said in court papers.

The baker estimated that shutting the plants will cost $17.6 million in the next three months. The plants have about $29 million worth of excess product ingredients, Hostess said.

About $6.9 million will be spent to close depots, while $8.8 million will be used to idle retail stores and $8.1 million will go to shutting corporate offices, according to a court filing. Perishable baked goods at retail stores will be sold at going-out-of-business sales, donated to charity or destroyed, Hostess said.

‘Iconic Brands’

Potential bidder C. Dean Metropoulos & Co., owner of Pabst Brewing Co., said it may seek to purchase Hostess’s “iconic brands,” which include Dolly Madison, Drake’s, Merita and Butternut. Flowers Foods Inc., maker of Nature’s Own bread and Tastykake snacks, also may pursue some of its rival’s assets, wrote William Chappell, an analyst with SunTrust Robinson Humphrey, in a note to investors last week.

Flowers is “one of the most eligible acquirers” of Hostess assets and brands, Amit Sharma, an analyst at BMO Capital Markets Corp. in New York, said in a separate note, citing Flowers’ management, acquisitions and “relatively small” overlap with Hostess’s major markets and products. Keith Hancock, a spokesman for Thomasville, Georgia-based Flowers, didn’t say whether it would bid.

Metropoulos, which paid $250 million for Pabst in 2010, said it looked forward to participating in the bidding. Daren Metropoulos, a principal of the Greenwich, Connecticut-based private-equity firm, said of Hostess in a Nov. 16 e-mail that “shedding the complications of the unions and old plants makes it even more attractive.”

No Comment

Tom Becker, a spokesman for Hostess, declined to comment on potential bids or the trustee’s motion. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said last week.

“We will try to get what we can from the assets,” Rayburn told Bloomberg Television. “It’s an over-capacity industry, though, so that’s going to be a difficult prospect.”

David Margulies, a spokesman for Bimbo Bakeries USA, didn’t respond to a call or e-mail seeking comment on Hostess’s assets. Bimbo, based in Horsham, Pennsylvania, is the U.S. division of Mexico’s Grupo Bimbo SAB, the maker of Entenmann’s cakes and Thomas’ English muffins.

Today, Rayburn said Grupo Bimbo won’t be a potential buyer for the bankrupt baker.

‘One Misconception’

“One misconception in the market is that Bimbo would be a buyer and bakery leadership told us in several plants that Bimbo would come in and buy, which is absurd,” Rayburn said in an interview with Bloomberg Television.

Rayburn cited Bimbo’s agreement with the U.S. Justice Department to sell some Sara Lee brands in order to complete its acquisition of Sara Lee’s North American bakery business.

“Due to antitrust, it would never happen,” Rayburn said.

Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said.

Hostess, based in Irving, Texas, said in court papers the liquidation will take about a year and about 3,200 workers will be retained to clean bakeries and mothball equipment. The plants are in 22 states, stretching from Alaska to New Jersey.

The 82-year-old maker of Hostess CupCakes, Ding Dongs and Ho Hos has endured years of declining sales as Americans turned to rivals’ snacks and breads, while ingredient costs and labor expenses climbed.

Liquidation Push

Hostess said it was pushed toward liquidation when the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike Nov. 9 after Drain imposed contract concessions opposed by 92 percent of the union’s members. The union represents about 5,000 Hostess workers.

Hostess closed three plants permanently Nov. 12, blaming the strike, and warned that the company would liquidate unless enough employees returned to work to resume normal operations.

Sally Greenberg, executive director of the Washington-based National Consumers League, accused Hostess executives in a statement of “scapegoating” the union, “rather than take responsibility themselves.”

Bakers’ international union President Frank Hurt said Nov. 16 that the liquidation is a “deep disappointment for all of our Hostess members.” If they hadn’t accepted concessions earlier, “this company would have gone out of business long ago. Our members decided they were not going to take any more abuse.”

Secret Ballot

The International Brotherhood of Teamsters, representing about 6,700 Hostess employees, had urged the bakers’ union to let members decide by secret ballot whether to continue the walkout. Drivers represented by the Teamsters earlier ratified a new contract with 8 percent in wage concessions and 17 percent in benefit reductions.

“The company has clearly been mismanaged for some time,” the Teamsters said in a statement. “Unfortunately, the company’s operating and financial problems were so severe that it required steep concessions from a variety of stakeholders but not all stakeholders were willing to be constructive.”

Hostess sought court protection in January, its second time in bankruptcy, listing assets of $982 million and debt of $1.43 billion. The Teamsters and the bakery workers’ union made voluntary concessions in the first Chapter 11 reorganization, which began in 2004.

As consumers over the weekend purchased what may be their last Twinkies or Ring Dings following news of the liquidation, bids by potential suitors for the famous brands may mean they will continue to be available in U.S. stores.

Struggling Brands

C. Dean Metropoulos, founder of the namesake firm, has specialized in buying struggling brands, such as Chef Boyardee and Bumble Bee Tuna, and turning them around. The firm said it paid close attention to Hostess during its bankruptcy.

“We have analyzed this opportunity very carefully for a few years now,” Daren Metropoulos said.

Hurst Capital LLLP, an investment firm based in Sarasota, Florida, said today in an e-mailed statement that it filed a letter of intent with the court outlining what it called a multimillion-dollar offer to acquire all of the assets of Hostess Brands. The filing couldn’t be immediately confirmed in court records.

“With a skilled team of turnaround specialists, we can build upon the company’s history to levitate Hostess into a century year old brand,” Mike Manna, Hurst Director of Investment Performance said in a statement.

Blamed Management

Last week, as news reached employees at a Wayne, New Jersey Hostess plant, Rodica Salazar, 62, blamed management for the collapse. She said she worked at the company for 15 years.

“They don’t think about our lives, how you’re going to live, how you’re going to pay,” Salazar said. “I feel sorry for people, but not for them.”

Misty Williams, 40, said she worked at the company for 14 years. She expressed shock that management and union leaders had let their dispute end in such a catastrophe for 18,500 workers.

“They were just too stubborn, I guess, the union and management,” she said.

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

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