Hostess seen poised ‘to generate its own oxygen’
Hoping to emerge successfully from its bankruptcy, Hostess has final proposals before its unions.
BakingBusiness.com, Sept. 10, 2012
by Josh Sosland

IRVING, TEXAS — Less than two weeks from when labor unions are expected to decide whether or not to go along with the reorganization plan of Hostess Brands, Inc., Greg Rayburn, chief executive officer, offered a hopeful vision of the company’s future.

Hanging in the balance is whether the company will continue into the future as a going entity or will face imminent liquidation, Mr. Rayburn said in a Sept. 5 interview with Milling & Baking News. The discussion followed an earlier appearance on CNBC in which Mr. Rayburn described as “painful” an 8% wage concession sought from all Hostess employees.

In addition, the reorganization plan would require bondholders to lose about $100 million in claims. Hostess said professionals working on the case, including the lawyers and financial advisers for both the company and the union, have agreed to give up about $10 million in fees. Ripplewood Partners, the majority owner of the company, would lose its entire $150 million investment.

Hoping to emerge successfully from its bankruptcy, Hostess has final proposals before its unions, including the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and the International Brotherhood of Teamsters. Mr. Rayburn said results from the votes were expected by Sept. 17.

If negotiations with its unions and other key steps are successful, Mr. Rayburn declared that view Hostess will be on a path toward genuine success in coming years.

“What I want for Hostess is for it to be as strong a competitor as it can be, which I think is much more effective and strong than it has been in recent years,” he said. “I think it has tremendous upside, tremendous potential, but I want to see it do what I call generate its own oxygen. You’ve got to be profitable. You’ve got to make your own money. You’ve got to fund your own livelihood, and you’ve got to fund enough to make up for years of lack of investment. And those are the goals for this company, to have a plan that says we will have the funds to invest, we will make the investments. Sure, we might make mistakes along the way but I think there are a lot of opportunities for this business so that for a long time it will be around and be competitive.”

Hostess filed for bankruptcy protection in January 2012. It was the company’s
second such filing in the last decade. Hostess (then Interstate Bakeries Corp.) filed for bankruptcy in September 2004 and emerged in February 2009.

Mr. Rayburn has been with Hostess for just over six months. His appointment as chief restructuring officer was announced Feb. 28, and he replaced Brian Driscoll as c.e.o. less than 10 days later. A partner at Kobi Partners L.L.C., Mr. Rayburn has more than 29 years of experience working with troubled businesses in their efforts to restructure. He is the sixth c.e.o. of Hostess over the last 10 years.

In the interview, Mr. Rayburn said his priority in recent days has been to explain to the company’s unions the rationale underpinning wage concessions and other elements of the Hostess reorganization plan.

“It has been difficult that’s for sure,” he said. “But I think we’ve made a lot of progress, and I’m just trying to get out to as many locations as I can to meet with the employees in person and talk to them about the proposal that’s in front of them and give them the facts and let them understand” what will happen depending on the vote outcome.

While he has extensive experience working with distressed companies, Mr. Rayburn said the fact Hostess is in bankruptcy for a second time sets his current engagement apart from earlier experiences, creating particularly acute challenges.

“This is more difficult because you’re effectively going back to an employee base that needed to make concessions that last time, and they’re back in the same place again,” Mr. Rayburn said. “I think that adds a significant amount of challenge to the process.”

That “challenge” has bubbled to the surface as Mr. Rayburn has traveled to meet with union representatives to discuss the reorganization plan.

“Our meetings have been good and productive,” he said. “But I think people are showing and you would rightfully expect that you are going to see a level of frustration. In some cases anger and disappointment at the package they are being asked to vote on and some of that stems from the fact as I said that this company has been through this process once. But I think people are also willing to hear the facts and prepare themselves to deal with the facts and make the best decisions that they can for themselves and then for the company.”

Asked to expand on what Hostess is seeking in the negotiations with its workers beyond the wage cuts, Mr. Rayburn put financial issues front and center.

“The two big buckets of change are really the wage concessions and also pension contribution adjustments,” he said. “Hostess’ history was that it was making $100 million dollars a year in pension contributions over half of which were going into multi-employer plans that were going to the benefit of people who never worked for Hostess. And so what we’ve tried to do is construct pension contributions that we can a) afford, and b) will be there when people retire and will be in relatively stable funds. So I think that’s what we’ve accomplished here.  Those are the two big economic changes this time around versus the last bankruptcy, and I think those are key to making sure that the company actually has money to invest in its plants and its equipment.”

The emphasis in his comments on wages and pension contributions should not be interpreted to mean that contract negotiations have neglected important work rule issues that long have been sources of contention between Hostess and its unions, Mr. Rayburn said.

“We actually have dealt with that, and I think we’ve come up with a set of changes to the work rules, some distribution changes that will make us much more competitive,” he said. “That’s all part of this package. I just was kind of pointing out sort of the big two in terms of the way I think the membership looks at it because it’s personal to them when you talk about pay cuts and the pensions. But those work rule changes are all part of this proposal. I expect to see Hostess a lot stronger competitor.”

Asked for contingency plans in the event labor negotiations fail, Mr. Rayburn was unambiguous in describing what will transpire. Hostess as a company would, in a very short period of time, no longer exist, he said.

“We would liquidate, and we would sell whatever brands and assets we could,” he said. “There wouldn’t be a merger. There wouldn’t be a different transaction. I think if we don’t get a majority of the bakers’ and Teamsters unions voting yes to the ratification, we would immediately start the sale of assets and Hostess would shut down.”

Given the frequency with which unexpected disruptions, such as gluten-free dieting or a severe drought, have hit the baking industry in recent years, Mr. Rayburn said conservative sales and cost forecasts in generating its reorganization plan were crucial.

“I think that this plan does address that, and I think that in my experience you have to be very careful year one after an exit,” he said. “You know, the way our concessions are designed with the 8% cut in year one, then they sort of creep back up after, that is really tailored to that concept that you have to give yourself a lot of margin for error. I think in our case, the lenders who are willing to exit this company and the union leadership and the management team want to make sure that whatever proposal we’re putting out for ratification or whatever our path is going to be, that there is very little likelihood of a return to
bankruptcy. I think that would be devastating. So I think that we are not projecting pie in the sky sales or new sales or new products. None of that is part of our plan. All of that would be upside to us.  I think we’ve taken very conservative views on commodity prices and baked that into the plan as well. So I’m very comfortable that we can achieve and execute the plan and have success without inordinate risk.”

Even if the company successfully completes negotiations with its unions, emergence from bankruptcy likely will require Hostess to divest parts of its business, Mr. Rayburn said.

“Part of our exit strategy and part of the way we are going to fund our success is to do an asset sale,” he said. “We are in discussions regarding an asset sale with actually different buyers right now so I can’t really give you any details on that.  But I think that once we have better clarity as to what that will be and what the timing is then we have more insight into capacity rationalization.”

In recent weeks Mr. Rayburn has indicated Hostess may sell its Merita baking business in the Southeast. Hostess acquired the business in 1987 from American Bakeries. At the time, the division was known as one of America’s most profitable.