Hostess, union mediation fails; liquidation next?

Nov. 20, 2012 at 7:25 PM ET

Bret Hartman / REUTERS /
A box of Hostess Twinkies is seen on the shelves at a Wonder Bread Hostess Bakery Outlet on Friday in Glendale, Calif.

Hostess Brands said Tuesday night that it failed to reach a deal in mediation with the Bakery, Confectionary, Tobacco and Grain Millers Union.

The bankrupt maker of Twinkies and Ding Dongs said it will have no further comment until a hearing scheduled for Wednesday at 11 a.m ET before the U.S. Bankruptcy Court for the Southern District of New York. 

A union representative did not immediately respond to a request for comment. 

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The ailing company, which also makes Wonder Bread and Drake's cakes, sought permission from bankruptcy court on Monday to liquidate its business, claiming that its operations were crippled by the bakers' strike and that winding down was the best way to preserve its dwindling cash.

On Friday, Hostess closed 33 factories and announced plans to lay off 18,500 workers over an acrimonious labor dispute. But on Monday, U.S. Bankruptcy Judge Robert Drain urged the parties to come to an agreement through mediation. 

Most insiders had anticipated that the two sides would come to an agreement, but the union and company could not find common ground. 

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The company has blamed union wages and pension costs for contributing to its unprofitably. Hostess Chief Executive Gregory Rayburn has also said the company's labor contracts have deterred would-be bidders for the company and its assets. 

Here's what each side previously agreed to:

Teamster Union concessions:

  • 8 percent immediate pay cuts, which would go down to 5 percent next year
  • Hostess will reduce contributions to the health plan by 17 percent
  • Hostess will freeze pension contributions until 2015

Management concessions:

  • Gave Teamsters 25 percent share of company stock
  • Gave Teamsters two seats on the board
  • Gave Teamsters a $100 million claim in bankruptcy
  • Won't permanently freeze pensions contributions
  • Former CEO's head on a platter: board ousted Brian Driscoll in March, 2012, after it was revealed his salary was tripled to $2.5 million at the same time he demanded steep pay cuts for workers

The next step is to go back to the bankruptcy judge, who will hold in his hands the fate of the 82-year-old company and its well-known brands. 

In the coming months, several different scenarios could play out, depending on whether a buyer emerges for the company's brands.

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"There's a lot of goodwill that comes with the brand name," said  John Pottow, a bankruptcy law professor at the University of Michigan. "A lot of companies could buy the name and recipe for Twinkies and make them."

Potential buyers wouldn't have to make the snack foods at Hostess factories either. They could make them in new facilities not burdened under old worker agreements that, for instance, required employing separate drivers for two different kinds of Hostess products rather than trucking them together. Among the alternatives:

Twinkies get absorbed by a big American conglomerate

Some of the likely suitors include ConAgra, Tastycakes maker Flowers Food, or McKeeFoods, makers of Little Debbie. These companies would likely seek to attach the Twinkies to a more efficient delivery system. For instance, does it really make sense to deliver Twinkies in their own special Twinkies trucks?

"Twinkie The Kid" trades his cowboy hat for a sombrero...

A Mexican firm, like Grupo Bimbo, which Forbes reports put in a bid for Hostess several years ago, could move production south of the border. A South American company could get access to lower sugar prices and a cheaper non-unionized workforce. Or, they could keep product in the US, but make them in a non-unionized factory.

...or develops a Canadian accent.

A Canadian company called Saputo has the Canadian rights to Hostess brand products. They're not affected at all by the Hostess liquidation and they could conceivably arrange it to sell Twinkies in America. 

Twinkies dies

Pure speculation: No one buys the Twinkies recipe. Fans are forced to make their own at home. Prices for unopened boxes of Twinkies skyrocket on eBay. An "Occupy Twinkies" movement launches to build an unauthorized Twinkies knockoff factory with no leaders and online-only sales... and is surprisingly profitable.

Related: Relax, Twinkies likely to live on

Court filings showed  that the company is asking for permission to pay $1.75 million in retention bonuses to 19 different managers as an incentive for sticking around during the liquidation process. 

The U.S. trustee, Hope Davis, an official appointed by the Justice Department to protect the interest of creditors, objected to this idea, filing a motion on Monday which argued that Hostess officials "have failed to demonstrate that the proposed bonuses are true incentive bonuses and not disguised retention payments."

Davis also moved to convert the bankruptcy from a Chapter 11 to a Chapter 7. That would take control of the wind-down proceedings away from Hostess and into the hands of a court-appointed trustee.

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In their joinder filed Monday, the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union said that "blaming the BCTGM for the Company’s liquidation is no more credible than blaming an isolated gust of wind for blowing over a tree, when it was the tree’s shallow, rotted root structure that was actually responsible."

But kids, both young and old, don't care about the blame game. They want to know whether they'll still be able to find their favorite creme-filled yellow cake treat on the shelves.

The decades-old brand is legendary in consumers' minds and evokes strong feelings of nostalgia in every bite. Some still remember the brand's signature character "Twinkie The Kid" lassoing it up on early television commercials and proclaiming "Big Delight in Every Bite!"

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The foodstuff has even entered the legal canon. "The Twinkie Defense" was famously, and successfully, used to argue that a suspect on trial for murder suffered from depression and that his high-sugar diet was a symptom of this mental state.

Ben Popken and Reuters contributed to this report.