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Home Publications Blogs CEPR Blog No Cupcake: Workers Turn Down Bad Deal from Hostess

No Cupcake: Workers Turn Down Bad Deal from Hostess

Written by Dean Baker   
Friday, 16 November 2012 17:33

There have been a number of news stories about the closing of Hostess’ factories and plans to liquidate the company in the wake of the refusal of one of its unions to accept reductions in pay and benefits and other concessions. It appears as though this will leave Hostess’ 18,000 workers without a job by the end of the year.

While this is certainly a bad story for the workers, it is not clear that they had a better route available to them. It is important to understand a bit about the history of Hostess in assessing whether the workers and their union made the right call.

Hostess has been relying on pretty much the same mix of products for decades. While other companies have sought to adjust to changing consumer tastes, Hostess still gets the vast majority of its revenue from a relatively small number of products that it has been selling in largely the same form since the sixties. This failure to innovate was the main reason that the company first went into bankruptcy in 2004.

Hostess remained in bankruptcy for five years until it was brought out of bankruptcy in February of 2009 by Ripplewood Holdings, a private equity company. Remarkably, it exited bankruptcy with nearly $670 million in debt, almost 50 percent more than the $450 million it owed when it went into bankruptcy.

Usually companies use bankruptcy to shed debt. With Hostess the opposite was true. This meant that Ripplewood was taking a heavily leveraged gamble. If the company survived, it would get a very high return on its investment. However there was a strong likelihood that the company would not be able to make it given its extraordinary debt burden and the weakness of the economy.

Ripplewood first asked workers for concessions in August of 2011. The workers refused since they had made substantial concessions in 2008 to facilitate the exit from bankruptcy. The concessions did not prevent layoffs of close to 20 percent of the workforce. The company also had stopped making payment to the pension fund in July of 2011 and is now more than $160 million in arrears.

Ripplewood took the company back into bankruptcy in January of this year, owing close to $1 billion. It has used bankruptcy to impose new contract terms on workers. This is the immediate cause of the current impasse, with the bakery workers’ union refusing to accept the reductions in pay and benefits and changes in work rules demanded by management.

Workers had several important issues to consider beyond just the prospect of working for less pay and under worse conditions. First, and most importantly, there was little reason to have much confidence in the current management team. They had done nothing to turn the company around in the three years since the last bankruptcy and there was little reason to believe that they would do any better going forward.

Accepting new concessions would provide no guarantee of job security. In fact, management wanted the unions to agree to the closure of 10-12 plants (of its choosing) as part of a new contract. This means that many of the company’s 18,000 workers would soon have been laid off even if the workers had accepted management’s terms.

Second, management was not shy about rewarding itself in spite of the company’s poor financial condition. The CEO upped his annual pay to $2.25 million and other top executives got raises of 35-80 percent. This doesn’t seem like the behavior of management that puts the survival of the company first.

Third, the financial situation of the pension has to be a top concern for workers. While the pension is guaranteed by the Pension Benefit Guarantee Corporation, the guarantee for multi-employer plans like the one at Hostess is limited. If the plan were to become insolvent then many workers would see large cuts in benefits.

From this standpoint, if Hostess were to continue to put off contributions to the pension and allow it to become badly underfunded, then workers could be looking at sharply reduced pensions in retirement. Workers who are approaching retirement age may view this prospect as a far greater danger than the risk of losing their job at this stage in their career.

Whether or not it was good judgment for the workers and their unions to refuse the concessions demanded by management is not clear. At this point, it’s still possible that the company was bluffing and will keep some of its plants open or that another buyer will come in and keep some of the plants operating.

However it is hard to blame workers for not putting their trust in a management team that shows little competence and is rapidly stuffing its pockets at the company’s expense. It is bad news for workers and the economy as a whole when such people gain control of major corporations.

(Thanks to Eileen Appelbaum and Mark Weisbrot for providing most of the background for this post.)

Comments (7)Add Comment
As much as I figured
written by Brett, November 16, 2012 4:45
That the executives were asking for concessions from employees while stuffing their pockets with cash. I wouldn't be surprised if there is a WS buyer ready in the background to buy up the Hostess assets -- the main sticking point to a deal was the unions, and they've now been crushed with this liquidation.
written by nix, November 16, 2012 5:56
The unions should pool their money and buy the company outright, then all the workers would be owners and they could make the decisions..
still blame the union
written by jess, November 16, 2012 6:48
if i worked there and my choice was less money or no job, i would choose less money. if i wasn't happy with the management handling of the situation or their rewarding themselves or the pension than i should have long gone from there having since 2008 to make a choice - and with all of the job creation obama has done it should have been easy to find another job.
That wasn't one of the choices
written by Jim, November 17, 2012 8:10
This is the second time that the company has declared bankruptcy, before, about 2002, the company tried to convince the court to let them desolve. Since then, when the contracts with the suppliers were declared worth 10 cents on the dollar, the company has tried to quit the business. The unions did not cooperate. they fought for their jobs, by taking wage cuts, The unions make less then half what they did in 2002. So management declared they would kill the benifits, they did. No pension, reduced work hours, reduced the size of the product, charged more for the product, did all the right things to kill the4 business. Remember this management group, is a goldmanSacks(not a misspell)morganStanley type management group, by the company, saddle it with impossible debit, and sell off the pieces type company. After claiming they were there to not do that. So if you see a management group take over a company, not invest in upgrading the employees, or the facilities, get out fast before they kill your company.
^^^ ballbag.
written by Fitter420, November 17, 2012 8:19
They took pay cuts. They took concession after concession. The article says even if they took a pay cut they would still get laid off.... 2.25 million a year for the CEO. Hmmm where is the problem here.
Was the Twinkie "Bained?"
written by Bob, November 19, 2012 5:06
Was the Twinkie "Bained?"

If we peel off the wrapper there are many more aspects to the Hostess situation that warrant attention.

One of the more fascinating things revealed during the election was the particular approach, call it financial extraction, used by Bain and its ilk. Hostess Brands, Inc. is majority owned by private equity firm Ripplewood Holdings. As you noted, Hostess has a mountain of debt yet somehow it's the Bakers union's fault the company and its high profile brands are now being sold off to the highest bidder. Hmmmm.

I'm very curious to know just how much in dividends and management fees Ripplewood has raked in since 2004. Is the strike just an excuse to sell off the firm's brands as an exit strategy? Sounds to me like the Twinkie got "Bained." I hope there's an inquisitive journalist out there right now working on that story.
Why aren't Management being prosecuted?
written by Mad Hemingway, November 25, 2012 2:26
If the union's concessions were used to provide CEO and management with raises, rather than helping the company, then why aren't the CEO and management being prosecuted?

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