Bankruptcy Courts Part 3 - Hostess Bankruptcy: Unions, Management or Investment Bankers...Where's the Dough?
A staple food group icon of an overweight America now becomes an example of what is wrong in our business system and bankruptcy processes. In an announcement last Friday, November 16th, Hostess CEO Gregory Rayburn, said "We deeply regret the necessity of today's decision [to shutdown Hostess' entire business], but we do not have the financial resources to weather an extended nationwide strike." So how exactly was the money spent after the 2004 restructuring by private equity firm Ripplewood Holdings? Was it well directed toward rebuilding the company's business? The decision to force Irving, Texas based Hostess and their entire brand line of products out of business will mean the end of 18,500 jobs and two billion Twinkies. But who walked away with the dough?
BREAKING NEWS UPDATE: According to the Houston Business Journal at 2:50 p.m. today, Hostess Brands, Inc. and the BCTGMI Union have entered into a confidential mediation stopping the planned shutdown of the company.
I learned about the bankruptcy of this Texas-based American icon while digging through news articles on Bankruptcy Law Review during my research of the Delphi and General Motors bankruptcy cases. It seemed there were several similarities in this cases including the linkage of Judge Robert Drain of the Delphi Pension Scandal fame. Once again, Judge Drain went on a pension killing mission discussed later in this article. This begs an interesting question. Why is a bankruptcy trial for an Irving, Texas corporation being held in the Southern District of New York Bankruptcy court instead of one of the Northern District of Texas courts in Dallas?
In reviewing the information about this proposed business closure, there seem to be two schools of thought in the blame game. One school of thought is that stubborn unions refused to make concessions and forced this radical step from management. The other is that the unions have been making concessions for years while Wall Street investment bankers, along with management, have been extracting hundreds of millions in profits. But what about the $130M purchase by private equity firm Ripplewood Holdings in the 2004 bankruptcy restructuring and the fact that Hostess had over $860M in debt earlier this year, making it difficult to operate and be profitable? Was the 2004 restructuring prudently planned and executed for long term operations success? Where is the dough?
For the record, this writer has a life-long predisposition to believe the unions are usually in the wrong. But is that the case in this situation? Members of these unions have been taking wage and benefit cuts for years while executives have been granting themselves massive pay raises. In a statement released last Friday, Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGMIU) President Frank Hurt said,"...the truth is that had it not been for the valiant efforts of our members over the last eight years, including accepting significant wage and benefit concessions after the first bankruptcy, this company would have gone out of business long ago."
Business Insider reported that an independent consultant for the company advised that the bankruptcy plan submitted by the company to the courts was unreasonable because it did little to reduce the company's debt but unfairly pinched workers. He also cited the Hostess executive's compensation plans. Hurt claims the company is corrupt and was attempting to force "slave wages" on the workers while corporate executives took heavy raises and bonuses.
Is this part of the problem with the Chapter 11 concept of letting the "fox guard the hen house?" It was as recently as 2004 that Hostess went into bankruptcy and extracted $110 million in wage and benefit concessions. Since 2002 the company has gone through six CEO's (all making very hefty salaries and bonuses) while closing 21 plants and laying off thousands of jobs.
Hurt continued, “The BCTGMIU was informed (via the Unsecured Creditor Committee) that the Hostess CEO was awarded a 300% raise (from approximately $750,000 to $2,550,000) prior to the January 11, 2012 bankruptcy filing. Additionally, at least nine additional top executives also received incredible raises ranging from 35% to 80%. For example, one such executive received a pay increase from $500,000 to $900,000. The chief negotiator for Hostess received a pay increase from $375,000 to $656,256.”
In the meantime, workers were seeking a single digit percentage pay raises. In what could be perceived as bad faith, the company stopped making contributions to the workers pension plans six months before entering bankruptcy. According to Inquisitr.com, when the workers announced a possible strike, the company threatened to close some plants including one in St. Louis, MO. However, St. Louis Mayor Francis Slay said, "I was told months ago they were planning on closing the site in St. Louis … And there was no indication at that time it had anything to do with the strike the workers were waging.”
If our bankruptcy courts are now the new vehicle for redistributing wealth, let's take a look at where that wealth redistribution is taking place in this case.
- Unsecured creditors will lose the money they have loaned to Hostess in the form or products or services sold to the company on payment terms and other forms of unsecured debt. Many of these are small businesses who may have to shut down or lay of workers as a result.
- Workers of the company, union and non-union, will be laid off and many will lose not only their jobs, but pensions as well as Judge Drain declared their collective bargaining agreements void.
- Private equity firms make hundreds of millions by purchasing undervalued assets at firesale prices and restructuring the debt.
- Bankruptcy lawyers on all sides, including the unsecured creditors committee counsel, make tens of millions in billable hours not only during and before the bankruptcy process but after, by coming along and filing lawsuits against shareholders and any other person with assets they can find to sue.
- Company executives will have earned very nice wages and bonuses on their journey of destroying a company, despite $2.5 billion in sales, that had become an American icon.
While this case may be good for our waistlines, it casts more shadows and questions into the bankruptcy processes in this country and directly on the bankruptcy courts of the Southern District of New York. One thing you should expect from a judge on the bench is consistency in applying the law. There seem to be some very radical swings in the way Judge Drain applies the law in his White Plains, NY courtroom. This will be the topic of the next post in this series.