December 21, 2024

DealBook: As Labor Talks Collapse, Hostess Turns Out Lights

What might be the last Twinkie in America — at least for a while — rolled off a factory line Friday morning. It was just like the millions that had come before it, golden, cream-filled empty calories, a monument to classic American junk food.

But it is likely to be the last under the current management. After not one but two bankruptcies, Hostess Brands, the beleaguered purveyor of Twinkies, Ho Hos, Sno Balls and Wonder bread, announced plans to wind down operations and sell off its brands.

Since filing for Chapter 11 bankruptcy protection in January, Hostess has been trying to renegotiate its labor contracts in a bid to cut costs. But the talks fell apart, and last week one union went on strike.

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The so-called liquidation will probably spell the end of Hostess, an 82-year-old company that has endured wars, countless diet fads and even an earlier Chapter 11 filing. Although the company could theoretically negotiate a last-minute deal with the union, Hostess is moving to shut factories and lay off a large majority of its 18,500 employees.

But Twinkies and the other well-known brands could eventually find new life under a different owner. As part of the process, Hostess is looking to auction off its assets, and suitors could find value in the portfolio.

“The potential loss of iconic brands is difficult,” said the company’s chief executive, Gregory F. Rayburn. “But it’s overshadowed by the 18,500 families that are out of work.”

The company’s current problems stem, in part, from the legacy of its past.

An amalgam of brands and businesses, the company has evolved over the years through acquisitions. In the 1960s and 1970s, the company, then called Interstate, bought more than a dozen regional bakeries scattered across the country. A couple of decades later, it paid $330 million for the Continental Baking Company, picking up a portfolio of brands like Wonder and Hostess.

As the national appetite for junk food waned, the company fell on hard times, struggling against rising labor and commodity costs. In 2004, it filed for bankruptcy for the first time.

Five years later, the company emerged from Chapter 11 as Hostess Brands, so named after its most prominent division. With America’s new health-conscious attitude, it sought to reshape the business to changing times, introducing new products like 100-calorie Twinkie Bites.

But the new private equity backers loaded the company with debt, making it difficult to invest in new equipment. Earlier this year, Hostess had more than $860 million of debt.

The labor costs, too, proved insurmountable, a situation that has been complicated by years of deal-making. The bulk of the work force belongs to 12 unions, including the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

The combination of debt and labor costs has hurt profits. The company posted revenue of $2.5 billion in the fiscal year 2011, the last available data. But it reported a net loss of $341 million.

With profits eroding, the company filed for Chapter 11 in January. It originally hoped to reorganize its finances, seeking lower labor costs, including an immediate 8 percent pay cut.

The negotiations have been contentious.

The Teamsters, which has 6,700 members at Hostess, said it played an instrumental role in ousting Hostess’s previous chief executive, Brian J. Driscoll, this year after the board tripled his compensation to $2.55 million. The union also hired a financial consultant, Harry J. Wilson, who had worked on the General Motors restructuring.

While highly critical of management missteps, the Teamsters agreed in September to major concessions, including cuts in wages and company contributions to health care. As part of the deal, the union was to receive a 25 percent share of the company’s stock and a $100 million claim in bankruptcy.

“The objective was to preserve jobs,” said Ken Hall, the Teamsters’ general secretary-treasurer. “When you have a company that’s in the financial situation that Hostess is, it’s just not possible to maintain everything you have.”

But Hostess reached an impasse with the bakery union. Frank Hurt, the union’s president, seemed to lose patience with Hostess’s management, upset that it was in bankruptcy for the second time despite $100 million in labor concessions. He saw little promise that management would turn things around.

“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years,” said Mr. Hurt. “They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and ‘restructuring specialists’ walk away with untold millions of dollars.”

About a month ago, Mr. Rayburn said, the bakers union stopped returning the company’s phone calls altogether. For its part, the bakery union said the company had taken an overly aggressive approach. David Durkee, the union’s secretary-treasurer, said Hostess had given an ultimatum. “They said, ‘If you do not ratify this, we are going to liquidate based on your vote.’ ”

With the company standing firm, the bakery union struck last week, affecting nearly two-thirds of the company’s factories across the country. The Teamsters drivers honored the picket line, further shutting down the operations. The company gave union members until 5 p.m. on Thursday to return to work.

Mr. Rayburn said the financial strain of the strike was too much for the company, which had already reached the limits of its bankruptcy financing. Over the last week, Hostess lost tens of millions of dollars as many customers’ orders went unfilled. And its lenders would not open their wallets one more time.

By Thursday morning, Hostess’s executives were ensconced in the company’s headquarters in Irving, Tex., still hoping that enough employees would return to work to resume production. A small number of workers had already crossed the picket lines that had sprung up at most of the baker’s factories, but more than 10 plants remained well below their necessary capacity.

Mr. Rayburn’s deadline of 5 p.m. passed without either side backing down. Soon after, executives asked the company’s legal advisers to finish the court motions that would begin the liquidation. Papers had been drawn up well before that afternoon.

Around 7 p.m., Mr. Rayburn had his final discussions with the company’s board and his senior managers and made the call to begin winding down.

“We were trying to focus on where people were having success, but I had to make a call,” Mr. Rayburn said.

Article source: http://dealbook.nytimes.com/2012/11/16/hostess-brands-says-it-will-liquidate/?partner=rss&emc=rss

Olympus Sues Executives Over Cover-Up

Olympus shares jumped nearly 30 percent on the announcement, as investors bet that legal action against those implicated in the $1.7 billion cover-up would head off a delisting from the Tokyo Stock Exchange. Shares in the company had lost four-fifths of their value at one point.

Still, critics warned that keeping tainted executives at the helm of Olympus threatened to undermine its turnaround effort by allowing discredited board members to name their successors and subvert meaningful reform. The company remains in dire need of fresh capital after restated accounts showed its shareholder equity at far lower levels than previously disclosed.

Olympus defended its decision. “The plan is for the current board members who were found responsible and are subject to lawsuits to complete passing on their roles to avoid any impact on business,” the company said in a statement.

Olympus, the Japanese manufacturer of cameras and the medical devices called endoscopes, has admitted to concealing losses dating to the 1990s using an elaborate scheme involving offshore funds in a case that has cast a spotlight on corporate governance lapses in Japan.

That admission came after its former president and chief executive, Michael C. Woodford, blew the whistle in October on fraudulent accounting at the company — an action for which he was fired.

Mr. Woodford, who is British, later made a bid to return to the company with a fresh slate of directors, but he abandoned that effort last week after Japanese institutional investors continued to back Olympus’s current management. On Tuesday, he blasted Olympus over its announcement, pointing out that three directors who had fired him instead of investigating his allegations should not be allowed to remain on the board.

“If these three individuals continue in office, it is completely the wrong basis to revitalize Olympus,” Mr. Woodford said. “The only way forward is an entirely new board of directors, untainted by the past scandal,” he said in an e-mailed statement.

Southeastern Asset Management, a U.S. firm that is Olympus’s biggest overseas stockholder, has also urged the company to purge its current management.

Olympus “continues to suffer under shoddy corporate governance and an utterly discredited board,” Josh Shores, a principal at Southeastern Asset, said in a statement last Friday. “We maintain that the board should be replaced and a new board should oversee the company’s revival.”

The Tokyo-based company said it was seeking up to 3.6 billion yen, or $47 million, in damages from 19 executives, including former Chairman Tsuyoshi Kikukawa, former Executive Vice President Hisashi Mori and its former internal auditor Hideo Yamada. A third-party investigative panel appointed by Olympus said last month that the trio had orchestrated the scheme to mask investment losses.

Olympus is also suing Shuichi Takayama, the current president, for as much as 500 million yen, according to the company statement Tuesday.

Olympus refused to make any of its executives available for comment.

The scandal has led to investigations in Japan, the United States and Britain.

Article source: http://feeds.nytimes.com/click.phdo?i=73b93cdec02e593ce8000defa2b98c71