What Was Really Baking In The Hostess Ovens

The current bankruptcy can find it roots in the last bankruptcy. During the last bankruptcy, the International Brotherhood of Teamsters solicited Ripplewood Holdings to take over Hostess. During the negotiations of the last bankruptcy, the IBT received 3% stake as a partial owner. So if we wish to blame the owners for raping Hostess, the IBT should also be held accountable. Every time Ripplewood tried to make cost saving measures that would affect the labor force, the other owners – the International Brotherhood of Teamsters – undercut their efforts. Imagine that.

So point one:

•When the union is the party that found the hedge fund company that made Hostess worse and at the same time got a 3% stake in the ‘reorganized’ company, they share in the blame.

Point two:

•When the union gives the company a hard time because the company wants to combine bread and cake thereby saving money, they share in the blame as to why the company is not profitable.

Point three:

•When the company wants to close plants in Southern California to get out of non-productive markets and the union fights it tooth-and-nail, the union is to blame for getting in the way of the company becoming profitable.

In order for the employees of Hostess to fully understand the company’s position, a statement of fact was sent to the employees by Greg Rayburn, CEO. Mr. Rayburn started his letter to the employees with this:

“Hostess has an unsustainable and uncompetitive cost structure. Our costs are higher than our competition and because they are too high we lose money. Our labor costs, our infrastructure costs, our corporate overhead and our past acquisition legacy costs are too high. Our cost structure is contributing substantially to our financial troubles and is largely responsible for the Company filing Chapter 11 in January 2012. In order to succeed in the future we have to revise our retirement plans, healthcare programs and work rules. If we don’t, we won’t attract the financing required to exit Chapter 11 and to make much needed investments in facilities and equipment.”

The statement of facts that followed was as complete as anything that I have ever seen given to the employees of a failing company outlining where they were and how they could come out of this intact. One of the major cost was the benefit plans, starting with its pension plan.

Hostess was a part of a Multiple Employer Pension Plan. Like most MEPPs, theirs was in trouble financial trouble.

Joint benefit funds that are entered into by both employer and union fall under the Taft-Hartley Trust Law and are considered ERISA Trust. These Trust have an equal number of representatives from the employer and union that steer the direction of the trust. Three years ago when the DOW was tanking. The fund manager continued to be aggressive according to one insider, which put the pension fund in peril.

Credit Suisse Securities have found that overall, MEPPs are $369 billion underfunded or if you prefer , 52% funded. This should not be anything new to the Teamsters Union whose Central Pension plan faces insolvency within the next fifteen years. Hostess was contributing an unsustainable $103 million per year to their pension plan.

MEPPs have become a huge problem for many companies with long time union contracts. When a company enters into a MEPP, they become a responsible party for all of the plan retirees. Even if those retirees never worked for your company. Therefore, if a company that is a part of the Hostess MEPPs went out of business, Hostess would be financially responsible for the failed company’s employees that had already retired. This of course led to higher pension costs for Hostess.

As it were, the MEPP that Hostess did belong to had a drastic reduction in companies that contributed to it and the remaining contributors were forced to pay for the pensions of the failed companies. In fact, Hostess was contributing 50 cents of every dollar the contributed to pay for retirees who never worked for Hostess.

Hostess could no longer carry the burden of retirees from companies that had closed their doors many years ago. They needed to cut their pension investment by 75% in order to get the much needed infusion of cash.

Hostess highly subsidizes the medical and dental plans at 85%; the industry average subsidizes at 75%nancially. Hostess proposed placing their unionized workforce in the same health care plan as the management and nonunion workforce.

It was time for Hostess and for the unions to face the hard facts, they could no longer kick this can down the road. The company had lost a staggering $341 million in 2011 alone. They were operating with a profit margin of -1.0% in comparison to Sara Lee and Bimbo whose operating profit margin is +15.7%. Hostess had not invested enough in their fleets, bakeries, and information systems which also held them back from being competitive. However, Hostess had not produced enough profit to make these capital investments.

Rayburn had a plan to turn the company around. It was, in fact, an aggressive plan that would have attracted investors. A plan that would have involved investments in new technology and updated facilities, which would bring efficiencies that would lower costs and improve competitiveness.

His “Turnaround Plan” included, investments in bakery automation $130 million, new product research, marketing and advertising $120 million, and 600+ new route trucks, tractors, trailers, etc . $60 million.

To do all these things, Hostess needed to create a sustainable cost structure. In order to have a sustainable cost structure, they had to modify the labor agreements. Rayburn was also willing to include Union Representatives on the new Board of Directors.

Rayburn also included in his Statement of facts to the unionized employees the “Consequences of a Major Work Action ”. He did not pull any punches.

• A Strike or Work Stoppage = A Permanent End to Hostess Brands

• The Company would be forced into immediate liquidation

A strike would, among other things, cause the Company to move into liquidation posture under the terms of the Company’s financing documents:

• They would no longer have cash to keep operating

• All Hostess Brands operations would shut down and liquidation would begin

18,500 jobs, plus the health insurance that comes with them, would be lost for good.

Maybe the Unions thought that they would receive the same bailout as the UAW and the auto companies.

Maybe they thought they could call the companies bluff. I don’t know, but let me express here what I do know.

The MEPPs of the unions are in deep trouble. That is why UPS cut a deal with Hoffa in 2007 to pull out of the Teamsters Central States Pension Plan. They paid a high cost to do so. Hostess saw the light, but too late. They fought to save their company and the unions were fighting to save their pension plans. This is really what the stand off was about.

Now the unions are willing to go back to the table and talk in another attempt to save the failing company, but maybe not the pension plans.

The following link will take you to the Department of Labor’s list of MEPPs in trouble. When Enron failed, the Federal Government passed a law called the Pension Reform Act which required pension plans to be made public if the entered into three stages, 1) Warning Status, 2) Critical, and 3) Endangered. http://www.dol.gov/ebsa/criticalstatusnotices.html

Despite what pundits on the left or right are telling you, the true reason those union members were willing to play chicken with Hostess was that their the survival of the union pension plan was at stake. I have seen the solution that Hostess offered, and it included a 401K and an exit from MEPP. Safe to say, the union used the fear of no pension to put the livelihood of their members in jeapordy.

Many companies are still involved in MEPPs and it will continue to be a problem going forward.