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Most people seem to assume that Hostess was operating under a traditional business model that was outdated and cumbersome. That in the end the company failed because they couldn't sell enough product in a changing consumer base to cover their expenses.

Whether people blame the Union or the company, this theme seems mostly universal.

It just simply isn't the reason for the closure of Hostess plants.

This common sense assumption about how business works can be broken down to one simple statement that most people go along with.

"It is the goal of the company to make as much money as possible for the owners."

Can I assume that we all agree with that? If you don't then I got nothing for you, go back to cable.

Most people think that means the Hostess business model includes efficiently producing a high quality bread product and selling enough of it to surpass their expenses. I spent many years there assuming the same thing. That is the traditional business model of a large scale bakery. But you have to ask yourself 'who is Hostess?' and 'how do they define profits?'

Hostess in a legal sense is a piece of paper. A privately held piece of paper. Passed from owner to owner for the purpose of profit. The current owners are hedge funds Monarch and Silverpoint, with the later addition of Ripplewood. They are the board of directors. You may have heard that there have been 6 CEOs since 2002. There has only been one ownership group that whole time, the hedge funds.  It is their business plan that those CEOs executed. Well.

The goal always was to maximize profits. Baking just wasn't a part of that picture. Monarch and Silverpoint funded the bringing together of Hostess/Wonder and Butternut/Dolly Madison in 1999. Both baking companies were profitable and had great infrastructures. Neither company was failing.

When these hedge funds figured out that they had to actually reinvest in their facilities and delivery equipment over the years, they simply didn't. Instead they turned their profit focus to brand valuation and pension theft. The goal was to lower Union costs then sell the brands and bakeries. They were able to strip 1/3 of our yearly income in the first bankruptcy and the management was paid millions while the company lost 100's of millions. They failed to break the Union so they held onto their investment while forcing the company to suffer for a few more years.

The company intentionally loaded itself with debt it knew it would never have to repay, $341 million in the year leading to the second bankruptcy, up from $136million the year before. That overbloated, intentional debt is now used by the company to blame the Unions for costing too much. The pension total that they stole from the bakers was only $50million of the $341million loss. Again, most of those debts are gone, like the $4.25 an hour they stole from our checks for over a year.

This company sold $2.5Billion last year. They have sold $68million worth of Twinkies this year so far. If these hedge funds and their toy CEO create brand and bakery packages and sell them off, they will be profitable. Even after years of losses. Profitable enough to even pay their pension debts. But they won't, because the judge has already waived those debts. And they will do it at the loss of thousands of jobs and pensions.

What does it cost to buy a couple of bakeries and a brand line like Drake Cakes? With no Union? How about 10 bakeries and the brand lines of Wonder/Hostess, including Twinkies, Cupcakes, Suzy Q...? How about 5 bakeries and the brand lines Home Pride and Nature's Pride? Is the combined total $1Billion? $1.5Billion? More?

How about $2.4 BILLION.
Joshua Scherer, a partner at Perella Weinberg Partners, a Hostess advisor said it could be worth $2.3 billion to $2.4 billion, an amount equal to its annual revenue. It also has about $900 million of secured debt and faces up to about $150 million of administrative claims.

Correct me if I'm wrong, but does that mean they owe $1.05Billion (which does not include my pension) and may sell for $2.4 Billion. That would be a profit of $1.35Billion.

These hedge funds were not bakers, they were bankers. They will make money on their 14 year endeavor. 100's of millions no doubt, over a billion dollars possible. Their goal was to break the Unions and sell off the brands from the beginning. By that measure, this CEO deserves a raise. His only problem was that the Bakers Union knew what was up and threw a wrench in the plan. Now the CEO wishes he would have taken any number of previously ignored (and denied) offers.

They may have had 6 CEOs since 2002, but I bet the hedge funds view most or all as successes. They bought stuff with money they didn't have to repay. They reduced labor costs all along the way. Now they have made their final push to break the Union so they can sell off the bakeries and brands at higher rates. And they have used their media savvy to create a misleading storyline about Union greed. Lost in the Hostess discussion is that after Hostess sells off the brands in liquidation, Monarch and Silverpoint will likely profit 100's of millions of dollars. And give another bonus to the CEO who has executed the business plan pretty well, up until the Bakers decided to take our ball and go home. It's sitting on the couch next to me as I type.

They will prove to be profitable in the end. But none of that money will end up in the hands of the people they owe money too. Not just their workers but also suppliers and transport companies who went unpaid in either one, or both, of the bankruptcies. The Monarch Silverpoint business plan has been pretty successful. It's just that baking bread efficiently and at a high quality was never really part of that business plan.

UPDATE- In my first diary I point out '$3+' stolen from our pension per hour. The exact number is $4.25. It breaks down to $3.26 per hour for my pension, $.75 per hour for retiree insurance, and $.24 for retiree death benefits. Who steals that?

Update #2 This is essentially my opinion about what the goals of this company were and my predictions of what will happen to the owners. It's only source is the 14 years I have spent here at the bakery. It is the collection of memories and the thoughts of me and many of my co-workers. I am not a financial genius and I have no training related to this stuff. If I have something in the details wrong, it does not change what I think about the end result of the Hostess bankruptcy. I also know that the owners were previously creditors and they have been playing musical chairs for years with the 'public face' and the names of entities. Yet the board has been very consistent in it's behavior.

Update #3 I do not know if I can get in trouble for posting the LOU (Letter of Understanding). If I understand correctly, this is the actual document that is 'signed' as the contract. I will not post it till I know that I won't get in legal trouble. However I will show you the paragraph that is about wages. I have a hard copy so this is typed, not cut and pasted. I can put it up as a pdf if I should choose to post.

"wages: Effective the first Sunday following the ratification of this LOU,total wage compensation(wages and commision) will be reduced from the current wage and commision rates ("baseline") by 8% in the first year of this LOU, by 5% from the baseline in the second, third and 4th years of this LOU, and by 4% from the baseline in the 5th year of this LOU."
My personal baseline is $16.12 an hour. Our Union believes this is an accumulated total of 27% over 5 years. The company says this means 4% over 5 years. We believe it is loaded language meant to get us to vote for it, under the guise of an 8% cut followed by a 4% raise, then sell us to another company and let their lawyers argue that we agreed to a 27 % cut. The company has known our feelings on this from day 1 and have refused to change the language. We can only assume the reason is that we are right.

No doubt many will debate whether or not we are correct. It means nothing. They have been given a chance to make the language more precise and have refused. We must and will proceed as we see it.

and just for fun The Pension Borrowing Letter pic

Originally posted to bluebarnstormer on Sat Nov 24, 2012 at 01:23 PM PST.

Also republished by In Support of Labor and Unions.

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