Hostess Brands Shutdown Halted as Company Asks for Bonuses

The plan would give the managers who devised and would carry out the shutdown program legal protection against litigation related to the shutdown, give asset-based lenders (the private equity firms who now control Hostess) priority over other creditors in getting paid out of the liquidation of the company’s assets, and allow Hostess to accelerate the cancellation of unwanted contracts and unexpired leases.

More controversially, it included a provision to pay $1.75 million in bonuses to corporate officers, high-level employees and other employees who would carry out the shutdown.

The U.S. Justice Department, represented at the hearing by U.S. Trustee Tracy Hope Davis, asked Judge Drain to convert the Hostess bankruptcy from Chapter 11 to Chapter 7 because the shutdown plan calls for paying bonuses to management.

In a motion filed with the court, Davis said that Hostess managers “have not demonstrated that the insider bonuses are permissible.”

Management countered that the shutdown requires “intensive planning” and would take several months, according to The Washington Post.

Judge Drain decided to temporarily halt the shutdown and ordered Hostess management and the Bakers union to appear at Hostess management’s lawyers’ offices Tuesday to see if a solution to the contract dispute could be mediated. U.S. Trustee Davis and the Teamsters union, which represents the largest number of Hostess employees, were also invited to attend.

“Drain cited “serious questions’ about the strike because the union rejected Hostess’ latest contract offer without filing an objection to it or discussing the possibility of going to mediation,” USA Today reported.

“My desire to do this is prompted primarily by the potential loss of over 18,000 jobs,” Drain said.

During Monday’s court hearing, Judge Drain also cited his “belief that there is a possibility to resolve this matter notwithstanding the losses that [Hostess has incurred] over the last week or so and the difficulty of reorganizing this company.”

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Buyers Eye Hostess Brands
If Tuesday’s mediation session fails to result in a settlement, the hearing on management’s shutdown proposal will resume on Wednesday.

Now that the Justice Department is involved, it may seek to take control of Hostess away from management and put under the control of a U.S. Trustee by converting the current Chapter 11 bankruptcy into a Chapter 7 bankruptcy. That would allow Hostess to be liquidated by the Trustee under Federal bankruptcy rules.

In the meantime, potential buyers are starting to line up.

Two private equity companies, Metropoulos, which owns Pabst Blue Ribbon breweries, and Sun Capital Partners, which owns several food companies, have expressed interest in acquiring Hostess Brands. Flowers Foods (NYSE: FLO), which is already a large bakery selling bread under the Nature’s Own brand and Tastykake snack cakes, said that it has renegotiated loan agreements to prepare for a possible takeover of Hostess.

It remains to be seen if Tuesday’s shotgun mediation session will produce results.

One of the key issues will be employee pensions, which remain at the heart of the disagreement between the Bakers union and management. Under the proposed contract that was accepted by the Teamsters but rejected by the Bakers, Hostess will suspend pension contributions until 2015. In the original management proposal, Hostess would have frozen employee pension plans and ceased new contributions altogether, The New York Times reported.

As we pointed out Friday, the issue of Hostess employees’ pensions, particularly what happens to multi-employer pension plans, could have implications that go beyond Hostess.

Investors will want to pay particular attention to the resolution of the pension issue if Tuesday’s Hostess Brands mediation efforts are successful.

Related Articles and News:

• Money Morning:
  Hostess Brands Shutdown Highlights Looming Pension Crisis
• The Washington Post:
  Hostess Moves to Liquidate as U.S. Seeks Trustee Control
• Los Angeles Times:
  Hostess, union agree to try mediation to avoid liquidation
• The Wall Street Journal:
  Hostess, Bakers Union Agree to Mediation
• USA Today:
  Twinkies maker Hostess, union head to mediation
• The New York Times:
  At Judge’s Urging, Hostess and Union Agree to Mediation
• New York Daily News:
  Bakers union must be allowed to vote on concessions to keep Hostess in business
• Forbes:
  Suitors Sweet On Hostess Line Up, But Company Will Try Once More To Stop Shutdown
• Businessweek:
  What Killed Twinkies