Hostess, the maker of Snoballs, Zingers and Twinkies, is preparing to file for bankruptcy again, just two years after emerging from its first filing. The company is hurting from a consumer move to healthier foods, and high labor and ingredient costs.
Hostess Brands is operating under a huge cash crunch, with more than $860 million in debt. In 2004, when the company was called Interstate Bakeries it filed for its first bankruptcy protection, then emerged in February of 2009. But it has struggled since then with sky-high labor costs, price hikes in its ingredients and changing consumer tastes moving towards whole grains rather than white-flour products.
According to Myfoxdc.com, Hostess employs more than 19,000 workers, operating in 49 states. Its overall costs exceed the company's roughly $2.5 billion in annual sales,
Hostess has worked to stay afloat after emerging from bankruptcy in 2009. Its private-equity owner Ripplewood Holdings invested $40 million in the company last year. Then, hedge funds Monarch Alternative Capital and Silver Point Capitol gave Hostess a loan of $20 million at the end of last year.
And if Hostess goes ahead with its second bankruptcy, which reports say it will later this week, it has prepared itself ahead of time. It has arranged for $75 million in what's called debtor-in-possession financing during the legal action, with a promise by investors to extend that should the proceedings drag on.
The Wall Street Journal online reports that because Hostess will be filing for bankruptcy for a second time, it will have to do so under what is called "Chapter 22". Edward Altman, a finance professor at New York University collects data that shows that between 2007 and 2011, over 50 firms filed those type of bankruptcies. Many resulted in liquidation of the companies. Analysts say Hostess's challenge will be to steer clear of that scenario.
In previous years, for example, Hollywood Video chain owner Movie Gallery Inc. and Polaroid Corp. have gone out of business after seeking bankruptcy protection a second time. But other companies have survived, including Hayez Lemmerz International, an auto supplier, and Pliant Corp. a packaging company.
While in bankruptcy, Hostess will be focused on reducing its debt and renegotiating its large group of labor contracts. The company deals with three major unions; the Teamsters, the Bakery, Confectionery, Tobacco Workers, and the Grain Millers Union. Hostess will be filing court papers soon saying it will reject or modify these labor contracts which will be allowed under the bankruptcy laws.
The snack and bread maker pays about $100 million a year into what's known as multi-employer pension plans which cover workers at many of its subsidiary companies. Hostess's current pension fund is underfunded by $2 billion, but would like to throw out its obligations to that plan and instead pay into one only covering its own workers.
Hostess sales of its best-brand, Twinkies recently dipped a bit and overall bakery snacks have been about flat. Hostess is feeling the pinch of losing consumers who prefer whole grain products and are moving away from white bread items. The company tried releasing a whole-grain break called Nature's Pride, but it hasn't performed well compared with voluminous rivals and hasn't gotten much presence on supermarket and store shelves. Even so, a Hostess spokesman said overall sales of Nature's Pride are beginning to increase, up 12.3 percent over the past year or so.
Hostess has always had a policy of keeping its prices relatively high, so it was hurt when costs for ingredients and fuel rose in the 1960s and 70s. But to increase profits, during that time, Hostess bought its largest rival, Continental Baking Company, which makes Wonder Bread, for $330 million.