Was Hostess' Death a Murder, Suicide or Natural Causes?
Catherine Downes

Was Hostess' Death a Murder, Suicide or Natural Causes?

In the years leading up to the collapse of Hostess — baker of Wonder Bread, Twinkies and Ding Dongs — it wouldn't have required a peek at the company's closely held books to figure out it was in trouble. Ask the guys who baked the snack cakes and bread. Ask the drivers who hauled them to distribution points, grocery stores, gas stations.

They'd say Hostess had been on life support. The plug finally got pulled.

Paul Storz, a Teamster driver, would have told you his old beater of a rig was bleeding oil the way Hostess hemorrhaged red ink in net losses for each of the two full years between this bankruptcy and the last one in 2009. It wasn't just his truck. "It probably looked like OPEC moved into the Lenexa [Kansas] bakery," he said. "There was that much oil on the ground."



Contact the author at brantley.hargrove@dallasobserver.com.

Mike Hummel, a bakers union member who clerked on the Lenexa docks, receiving shipments of tons of flour, would have told you he doesn't like to think about how much bread they had to toss. It was always something, maybe a bad conveyor belt or busted oven. "These people got to the point where they're putting Band-Aids on everything," he said.

One of the largest bakeries in the United States was crumbling, but nobody asked him, and that figured, far as Hummel was concerned. The guys running the company from Irving weren't bakers, after all. Hostess imported its last chief executive officer from Kraft Foods. The one before him (there were a handful in short succession over the company's final few years) came from Pepsi. The company itself was owned by a private equity outfit and a couple of hedge funds. In fact, nobody much thought about the rank and file until Hostess filed for bankruptcy in January 2012. Then it seemed like they were all anybody could talk about when it came to the roots of the company's insolvency. Suddenly, Hummel's pension and wages were what were grinding the company into the dirt.

After 14 years on the job, he made $16 an hour — $20 if you count the dough he and the other bakers had voted to sock away into their pensions. With that money, he bought a minivan to ferry his two kids to school, a Toyota Corolla, a split-level ranch in Lawrence, Kansas, and put his wife through college. Hostess brought Hummel, an outspoken bearded and ponytailed 36-year-old, into the middle class. He certainly wasn't joining the country club anytime soon, but he knew what a living wage was, and he wasn't eager to let go of it. That, he believes, was what Hostess was asking of him as it made demands in bankruptcy court throughout most of last year. The pension contributions from the company the unions had negotiated for themselves were gone. His health insurance costs would be tripled. And his pay would fall by 8 percent immediately.

He didn't recognize himself and his coworkers in the portrait of union greed and self-destructive intransigence painted by the company and some corners of the media, portrayals that fingered him for putting the bullet through Twinkie the Kid's cream-filled heart. Hostess had broken too many promises it made to him and his union brothers and sisters. There was a limit to how much he was willing to give. As it happened, he and the rest of the bakers union reached it October 3, when their wages and benefits got cut by roughly 30 percent. His bakery was the first to take to the picket line after the judge threw out the union's hard-won collective-bargaining agreements. A week later, Hostess was dead, sport for the crows on the auction block. With so many of its plants shut down by the bakers union work stoppage, management said the company had no choice but to liquidate. For killing the Twinkie, the bakers became the most reviled union in America. And Teamsters like Storz? Well, sure, they didn't strike with the bakers — Storz even crossed the picket line and hated himself for it — but at the very least his union strangled the company with extravagant wages (Storz made $48,000 annually) and pension benefits. That was the one story, anyway. The unions killed Hostess. Now the guilty parties — some 19,000 workers, mostly union — stood in the unemployment line, and didn't that serve 'em right?

On the other side (usually of the political spectrum), Hostess was seen as a victim of Wall Street rapacity. Wonder Bread? Just another casualty of Bain Capital-style private-equity pillaging. The recipe was by now all too familiar. Snatch up a distressed company for a song, add debt liberally, slash costs, extract generous management fees and, if it can't shoulder the load, hello again, Chapter 11.

Now that Hostess is in the process of being hacked to pieces for the fire sale, the snack-loving American public, in its grief, bewilderment and rage, has been trying to figure out which of the scenarios led to the (possibly temporary) loss of its confection-by-chemistry junk food. It's the black-and-white tale of today's two Americas: Either the bankers plundered Hostess at the expense of the working stiff, or the unions were a leech on its hide, draining the company in a kill-or-be-killed free market. If only the story of Hostess' demise were that simple.

The Twinkie was born at the bottom of the Great Depression, not because of some inspired aha! moment that would forever change the face of snack food, but because management, like nature, hates a vacuum. Back in the '20s, when Continental Baking Co. started selling snack cakes under the Hostess brand, Schiller Park, Illinois, plant manager James Dewar wanted to occupy the shortbread pans when the strawberries that went into the filling for the Little Shortbread Fingers weren't in season. His solution in 1930: inject them with banana-cream filling instead. The Twinkie we know didn't exist until World War II created a banana shortage, and Continental simply substituted the fruit with vanilla cream.

The gripe the company heard most often was, ironically, about the Twinkie's ridiculously short shelf life. Shopkeepers had to rotate the stock out almost daily because of the eggs, butter and milk. And so was born the modern petroleum-derived, alchemical wonder we know and love today. Instead of eggs, monoglycerides and diglycerides. In place of actual fat in the cream filling, Polysorbate 60. (Thirteen percent of your daily saturated fat allowance in a single snack!)

Generations of Americans were weaned on this stuff, and up until recently, they bought 500 million Twinkies a year. The cream-filled sponge cake had a knack for lodging itself into the public consciousness in absurd ways. When a San Francisco man was tried for the murder of Mayor George Moscone and City Supervisor Harvey Milk, he blamed severe depression, the evidence for which was his gluttonous Twinkie intake. Thus was born the "Twinkie defense." In Minneapolis, a City Council candidate was indicted for bribery when he served his prospective constituents ... you guessed it, Twinkies. The charges were dropped, but the moniker "Twinkiegate" stuck.

In 1995, a group of Rice University students in Houston subjected the Twinkie to a battery of stress tests. They electrified it (it had little effect). They incinerated it (the resulting fumes were described as "noxious"). They dropped it from a sixth-floor window (it ruptured slightly on one side and emitted what could only be described as a "splurt"). The series of experiments was dubbed T.W.I.N.K.I.E.S (Tests With Inorganic Noxious Kakes In Extreme Situations). And that was part of the problem. We were starting to actually think about what we ingested. White bread and sugary snack cakes containing ingredients with unpronounceable names began to fall out of favor. Yet Hostess, then known as Interstate Baking Co., remained trapped in the Howdy Doody days, when a folksy, anthropomorphic talking snack cake named "Twinkie the Kid" hawked Twinkies in boots and a cowboy hat.

Interstate filed for its first bankruptcy in 2004. Revenues were sturdy at $3.5 billion a year but falling (in its Chapter 11 filing it blamed the low-carb Atkins and South Beach diets). It was operating at a loss, with some $575 million in debt on the balance sheet. The unions had negotiated some pretty sweet collective-bargaining agreements, too — 372 of them, which the company had accumulated as it bought up a network of 54 bakeries, 1,000 distribution centers and 1,200 outlet stores. Put simply, the company was bloated like the expanding American derriere, and it needed to lose weight. A succession of CEOs attempted to remold Interstate into a company with sustainable fixed costs and a sharply reduced debt burden. But as the years passed, and one of the largest bankruptcies in U.S. history at the time also became the longest, the company deteriorated. Meanwhile, the hedge funds who'd bought equity in Interstate during the days when the high-yield market was on fire (remember them?) were squabbling over what it was actually worth now (probably significantly less).

And then, after five years, Interstate's long winter was suddenly over, due in no small part to a timely investment of $130 million for an equity stake and control of the company.

Enter the private equity baron, who was anything but a cold-eyed, Romney-esque corporate raider. Tim Collins, who helmed Ripplewood Holdings, a private-equity outfit with reported billions under management, was a Democrat with a soft spot for unionized businesses. He had the blessing of former U.S. House Majority Leader Dick Gephardt, according to Fortune. In fact, a union official said, Gephardt, then a lobbyist and consultant on labor issues, facilitated the introductions between union leadership and the new investor. Ripplewood was prepared to lead a restructured Hostess out of purgatory.

It persuaded the hedge funds to forgive half of the $450 million in debt they held, convert the other half into a riskier, payment-in-kind loan whose repayment was predicated on blockbusting reveunes and to provide a new $350 million loan to introduce some much-needed liquidity.

First, though, they had to sell the unions on the plan. This was no mean feat given the rank and file's poisonous distrust of management. They were furious when they found out some 500 managers would get $6 million in bonuses — nearly $2 million of it would go to 17 top managers. It took some nerve to ask them for sacrifice while the guys at headquarters got bonuses. But, then again, Ripplewood had Gephardt's imprimatur, and that counted for something.

The unions were ready to play ball. And, boy, did they deliver.

In two rounds, the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers union cut deals to eliminate 10,000 jobs and close nine bakeries, 300 outlet stores and, in the process, save the company $110 million.

"The union comes up and says, 'They're screwed. It looks legit. If you take this, we can get out of bankruptcy with a shot at doing good again," Hummel, the baker, recalled. Part of the deal was that Hostess would invest some of the savings from concessions into new products and equipment upgrades to rebuild the thriving baking empire that once was.

At last, a newly reorganized company, now a private concern known as Hostess, was prepared to set off into that bright future. But the state in which it left bankruptcy was, to put it mildly, bizarre. For starters, it now had more debt— some $669 million — which is basically the opposite of how Chapter 11 is supposed to work. It didn't help that the country was in the midst of the worst economic downturn since the birth of the Twinkie. Perversely, while everything, including sales, was headed for the gutter, the price on commodities like flour and sugar was soaring. Hostess was burning through cash. What it really needed, like any business, was capital, but nobody was biting. And why would they? Hostess' debt was so high (and climbing) that there was no equity in the company to be had.

It was also no longer the biggest kid on the block. Grupo Bimbo, a baker out of Mexico City that had taken a run at Hostess during the bankruptcy and was repelled, had acquired bread maker Sara Lee. While Hostess' product line stagnated, Bimbo's diversified, and it accomplished this all with a fairly unionized workforce. It was now so big that the U.S. Department of Justice antitrust division would eventually tell the company to lay off on all the acquisitions. Its suite of bread products was so vast — big names like Ball Park Buns, Entenmann's pastries and Tia Rosa bread and tortillas — DOJ feared Bimbo would eventually monopolize the market. They had already eaten significantly into Hostess' shelf space and market share.

The company was a gaping carotid artery. By the time Hostess had paid all its bills, it was losing, according to a source familiar with its books, roughly $10 million a month.

The net losses told the tale of a company in a sales slump, overleveraged and underperforming. After its first full year out of bankruptcy, the company took a $138 million hit. The next year, its net loss more than doubled to $341 million. Eventually, by the time Hostess was in the midst of Chapter 11, its net losses for that year totaled more than a billion dollars. Of course once again the company couldn't afford its workers' pensions — underfunded by Hostess to the tune of $2 billion — or their wages. Hostess was worth, according to one source, maybe $550 million. Its debts totaled $860 million. The company was completely upside down.

The result was a Hostess workforce that felt betrayed. The promises to invest in new products and infrastructure, to bring Hostess into the new marketplace, weren't kept, couldn't be kept. All told, the company created one new entrant: the "all-natural" bread called Nature's Pride, which is the subject of pending litigation for trademark infringement.

In the last quarter of 2010, management came back to the Teamsters on bended knee — a little more than a year after exiting bankruptcy, no less — asking the international brotherhood to take another hit. Among other things, management sought to rewrite some silly, arcane Teamster work rules (the product of a company cobbled together over the generations through acquisitions) that would not allow route salesmen to deliver both snack cakes and bread. They even offered the union a peek at the books.

The Teamsters agreed to let their membership vote on it, and the consensus, by 52 percent that hadn't yet forgotten the last round of concessions, was to reject the deal. Negotiations between the Teamsters and management carried on fitfully as the company bled out.

The bakers union, for reasons known only to its leadership (they wouldn't be interviewed) sat out most of the talks, effectively conceding the lead to the Teamsters.

The problem may have been that the unions didn't see a credible solution from management, led by CEO Brian Driscoll, the latest in a transient line of top execs. Harry Wilson, a Teamster consultant and former U.S. Department of Treasury adviser who oversaw the General Motors restructuring in 2009, put it this way in court testimony: Hostess' plans revolved almost entirely around reaching a level of cash flow that would attract capital. And the only way management had proposed to do anything about it was to cut labor costs. But take General Motors, for example. It had higher labor costs than, say, Toyota or Hyundai, but that wasn't the real reason those companies were kicking GM's ass. They were winning because their cars were superior. If all Wilson's restructuring team at GM had done was cut labor costs, as Hostess proposed, GM would still be a failing enterprise.

The Teamsters believed Hostess was asking them once again to carry it into another inevitable bankruptcy on their backs, but they stayed at the table. The company didn't help its case by pulling the plug on pension contributions in July 2011. By January 11, 2012, with negotiations moving glacially, Hostess filed for bankruptcy in a White Plains, New York, federal court. There, the company whistled the same tune the unions heard the last time — its financial straits stemmed from an overwhelming labor burden.

Over the yearlong bankruptcy, management did a hell of a job selling that story. In April, Hostess' creditors discovered the company got around Chapter 11 rules governing executive compensation by giving its top managers huge raises before it filed for bankruptcy. Driscoll got a 300 percent raise to $2.5 million a year. Other executives received raises of between 35 and 80 percent. (Following an outcry, they were reversed.) Then, in February, Hostess petitioned to give Driscoll a $2 million bonus with another $2 million severance package if he was fired without cause or if the company liquidated. According to the court papers, "... Mr. Driscoll is key to re-establishing [Hostess'] competitive position going forward."

And here was management, pleading poverty to the union bosses while asking to pay its CEO millions in the midst of a crisis. The bonus package was a nonstarter, of course. The next month, the "key" and irreplaceable Driscoll resigned without explanation. In an internal email obtained by a committee of Hostess' unsecured creditors (namely the unions and their shafted pension funds), Driscoll cited "bargaining issues."

The negotiations ground on, each party with skin in the game trying to minimize its give, according to a union official close to the discussions, who described them as "confrontational, in-your-face style." Management tried to squeeze wage cuts and work rule changes out of the unions. The unions dug in on how much they'd concede, all the while demanding that the company reduce its debt to sustainable levels. The hedge fund lenders — who held the trump card, owned all that debt and had already taken a haircut during the last bankruptcy — were prepared to walk away from the table and collect what they could by selling Hostess off in pieces. And Ripplewood, the union-friendly private equity firm? By all accounts, its equity stake in Hostess had been completely wiped out. If it had planned on flipping Twinkie for a quick buck, Bain-style, it failed miserably. By the end, Ripplewood didn't even have a seat at the negotiating table.

Finally, in August, Hostess management said it had gone as far as it would go. Not only had the Teamsters (with no help from the bakers, to be sure) convinced management and the lenders to invest in much-needed upgrades and product development, they scored seats on the board of directors and an employee stake in the company worth as much as $75 million. Each worker would hold around $7,000 in Hostess equity, according to a source involved in the negotiations. Even more incredible, the hedge funds grudgingly accepted another haircut on the Hostess debt they owed. The unions would, of course, have to give too, but this deal — the product of 13 months of negotiations — was as good as it was going to get. If the unions wouldn't take the offer, the company would fold forever. The bakers union and the Teamsters put Hostess' last, best offer to the rank and file in September. The agreement called for a 30 percent cut in wages and benefits, with an 8 percent wage cut effective immediately.

The Teamsters voted by ballot to approve Hostess' offer by a margin of only a few hundred out of 4,400 votes.

Frank Hurt, the bakers union president, who had utterly abdicated his role at the bargaining table, neatly summed up the prevailing sentiment in his halls: "I would never sign this piece of crap."

A source familiar with the negotiations says the bakers union reps had approached a private-equity firm about taking a stake in Hostess. The deal the bakers union bosses proposed could be less painful for their membership, but one of its central tenets was laughably outlandish. For it to work, Hostess would have to eliminate all Teamster drivers from its delivery force. Such a plan, for obvious reasons, wouldn't fly, couldn't even get off the ground. Yet it may be one reason why the bakers union leadership was so hostile to the deal on the table — it simply thought it could do better. Or it did, until that prospect fell through. Then they virtually assured the bargain all the other parties had worked for would fail. Instead of mailing out ballots to its membership, like the Teamsters had, they held voice votes in their union halls. After all, who wanted to be the guy saying, "Wait up, fellas, let's think about this for a minute," after his brothers and sisters next to him had already thundered "Hell no!"?

Either way, it worked. The bakers shot the proposal down by a nine-to-one margin. Hummel explained his vote this way: "It would be impossible for me to just go out and replace the job I had. But I could replace the job they were trying to give me all day long."

In fact, so great was the distrust between labor and management, built on a foundation of executive bonuses and broken promises, that Hummel — and, he said, his bakers union leadership — believed the wage cuts, starting at 8 percent and shrinking every year thereafter, were cumulative. Meaning, eventually, his take-home pay would fall by 27 percent. The Teamsters say they didn't read the agreement that way. And Hostess says that wasn't the intention. The Teamsters and management contend the first-year 8 percent cut in the base wage would gradually be restored. But that wasn't the bakers union's story. "I would lose my house," Hummel said.

The bakers didn't even bother to challenge in court a Hostess motion to impose the wage and benefit reductions on its membership. The judge had no choice but to grant it. In a bankruptcy court rarity, the judge ruled Hostess could not throw out its bargaining agreements with the Teamsters, who had negotiated diligently. That was the most hollow of victories, though, because on November 9, the bakers walked off the job. Hostess petitioned the judge to allow it to liquidate. After an unsuccessful last-ditch mediation effort, the company's request was approved. Hostess was no more.

Don't weep for management, though. Driscoll landed on his feet as the chief of Diamond Foods, owner of Kettle Brand Potato Chips and PopSecret. Shed not a tear for the private equity guys, either; they're still obscenely wealthy, and even though Ripplewood's equity got wiped out, it'll still probably get something. The lenders? That's the funny part. Under the terms of the deal they hashed out with the Teamsters, they would have actually made less money keeping Hostess a going concern than they will now by just selling the brands at auction. (Flower Foods, owner of Nature's Own bread and TastyKake, already bid nearly $400 million for Wonder Bread and the other bread brands. Flower, by the way, probably doesn't want to have anything to do with the unions. There's also a private equity firm with a hipster taste for legacy brands that wants Twinkie and the other cakes for $400 million.)

Truly, the only schmucks out on their asses have blue collars. Storz, the Teamster driver, voted against Hostess' final offer. He said he doesn't know a single Teamster who voted differently. "They thought we were a bunch of goddamned idiots," he said. "Even after they closed their doors, three weeks later they gave themselves a bonus." It's true; Hostess petitioned the judge to let it pay $1.75 million in "incentives" to senior management during the wind-down. The U.S. Department of Justice asked the judge to appoint a trustee to oversee the liquidation because the bonuses may not be "permissible." The judge declined and let management pay out "incentives" anyway.

Storz, meanwhile, is still looking for a job. He's middle-aged. Employers wants youth. He doesn't want to leave his wife for weeks at a time, but everybody's looking for long haulers.

Hummel, the baker, cut off his cable TV, eats frozen burritos for lunch most days, eyes warily the expiration date on his federal safety net and hopes either his microbrewery takes off or he gets a power-line gig with the local utility. You'd think he might regret his union's decision to strike rather than take a deal that really wasn't that bad, considering the alternative. But you'd be wrong. Besides, what exactly was the lesson he and Storz were supposed to learn? Was it that not all private equity firms are rapacious Bains, but perhaps just gross miscalculators? That some hedge funds will stay at the table to keep a company going, probably longer than they should, instead of cashing out? Or that union bosses sometimes make moves that are entirely contrary to the best interests of the workers they represent?

Surely David Durkee, the new bakers union boss, has seen the latest bellwether: Michigan, a labor stronghold, recently ratified right-to-work legislation, so that workers can choose whether to pay union dues in a union shop.

And surely he's seen the latest Bureau of Labor Statistics report finding union membership at its lowest ebb in a century.

Now more than 5,000 of his membership are out on their asses in the cold, looking for work in an unfamiliar American marketplace. If there's a story here of two Americas, a story of union greed or corporate rapacity perpetrated by Wall Street, good luck finding it. There aren't many parties who don't have Twinkie the Kid's creamy blood on their hands.

Was Hostess' Death a Murder, Suicide or Natural Causes?
Catherine Downes


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