Mediation fails in negotiations between Hostess and union workers

WHITE PLAINS, N.Y. — Hostess Brands Inc., the bankrupt maker of Twinkies and Wonder Bread, said Tuesday that it failed to reach a deal in mediation with the Bakery, Confectionary, Tobacco and Grain Millers Union.

The company said it will have no further comment until a hearing scheduled for Wednesday before the U.S. Bankruptcy Court for the Southern District of New York.

A representative of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union did not immediately respond for comment.

The ailing company, which also makes Wonder Bread and Drake’s cakes, went to bankruptcy court Monday to seek permission 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.

But Bankruptcy Judge Robert Drain of the Southern District of New York urged the sides into a private mediation, prompted by a desire to protect the more than 18,000 jobs at stake.

Approximately 400 of those jobs were located in a 14-year-old, 280,000-square-foot commercial baking facility in Biddeford, where union members have been striking for approximately 10 days.

The 82-year-old Hostess runs 33 bakeries, 553 distribution centers, about 5,500 delivery routes and 527 bakery outlet stores throughout the United States. Bakery operations ceased last week, though product deliveries to stores continued in order to sell already-made products.

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.

Aside from its unionized workforce, analysts, bankers and restructuring experts have said that a fleet of inefficient and out-of-date factories has also eaten up costs. They have said the brand names were likely to be more valuable once they were separated from the factories and sold to nonunion competitors.

Behind closed doors

The bakers’ union called the strike on Nov. 9 after Hostess sought and won court approval to impose wage and benefit cuts.

Unlike other unions representing workers at Hostess, the bakers’ union did not contest Hostess’ action — which allowed it to reject a collective bargaining agreement and impose its offer.

Given the fact that the union did not fight Hostess’ motion in court, Judge Drain said it was “somewhat unusual to say the least, and perhaps illogical” that the union would then strike against it.

“Its an odd approach,” Drain said. “Before thousands of people are put out of work it would seem to me worthwhile for both the union and the debtors to explore why that happened.”

Drain also questioned whether the union had held discussions with competitors or potential suitors about a shiftover of jobs, saying the union’s response to Monday’s motion implied that it sees “meaningful sales available out there beyond the piecemeal sales that this motion contemplates.”

A lawyer for the union did not immediately return a phone call seeking comment on whether such discussions had taken place.

Buyers may emerge

Analysts have said Hostess’ brands, which also include the Maine-based J.J. Nissen, Nature’s Pride, Dolly Madison and Drakes, are expected to draw interest from rivals including Flowers Foods, Pepperidge Farm owner Campbell Soup Co. and Mexico’s Grupo Bimbo.

Brian Boyle, a food industry investment banker at D.A. Davidson & Co., said it was hard to gauge the value of the Hostess assets, given that there are a lot of plants that are old and inefficient.

“The other wild card is whether you’re going to see different buyers emerge for different segments of the business. So Flowers Foods, for instance, might want the cake segment and Bimbo could want the bread piece. So it comes down to ‘are the parts greater than the whole?’,” Boyle said. “In either case, significant labor and benefits concessions will be required.”

Private equity firm Metropolous & Co. said on Friday it was interested in pursuing the company, and on Monday, Fortune reported that Sun Capital Partners was interested. Sun Capital did not return a call seeking comment.

Striking workers outside the Biddeford plant have told reporters they hope to be able to return to work at the local plant if a buyer for the brands emerges, but said they will not accept, in particular, changes proposed to their pension plan.

“I’ve been waiting 25 years to get that pension,” said Chris Wilcox, a striking Biddeford worker. “To have that dangled in front of me with two years left to go … and have it snatched away at the last minute, that’s heartbreaking.”

The company did have a potential white knight at one point, according to Hostess. Last spring, an outside equity investor had made a viable proposal that would help the company reorganize, it said, but the Teamsters union refused to agree to changes to the pension program and the outside investor walked away.

The company spent the summer and fall negotiating with all of the 12 unions trying to find a common path to reorganization, and did gain certain agreements with the Teamsters and many of the other unions, though not the bakers’ union. At the same time, the company started putting together a liquidation plan.