At the behest of a bankruptcy judge, Hostess Brands got a short reprieve from liquidation in the form of one final meeting between management and union officials. But with the mediation failing and no more meetings scheduled, the company’s 18,500 workers (about 1,400 of them in Illinois) are almost certain to lose their jobs. A strike by the bakers union was the final blow, but the company’s situation was even more dire than commonly understood, for reasons that go well beyond one union or one contract. But when one steps back to look at the larger picture, unions still figure prominently in the snack maker’s demise.
And, wouldn’t you know it, there’s a bunch of woefully underfunded pensions, too; just like Illinois.
This is actually Hostess’ second turn in bankruptcy court. The first lasted from 2004 to 2009 and left the company with significant debts and labor costs. The company actually left bankruptcy with a higher debt load than it had when it went in. This was, to put it mildly, an unusual situation; ordinarily bankruptcy is used to provide relief from unmanageable debts. New management expected to be able to grow the company enough to pay off new investors, but to do that they needed to innovate and improve efficiency. While the unions were willing to make concessions and accept layoffs during the bankruptcy, once out of court they dug in their heels on work rules and pensions.
In a prophetic article for CNNMoney last July, David Kaplan described the conflict between Hostess’ investors and the dozen unions that represent most of its employees. Those unions negotiate more than 300 separate contracts with Hostess, and the tangle of union jurisdictions and work rules has complicated the company’s operations. The Teamsters, for instance, had terms calling for one driver to deliver one product while a second driver delivered another, adding costs and reducing efficiency.
But the biggest challenge was 40 defined-benefit pension plans that Hostess took part in. The company had $2 billion dollars in unfunded pension liabilities. The company also has about $900 million of secured debt and faces up to about $150 million of administrative claims. Estimates put Hostess’ value at $2.3 billion to $2.4 billion in a normal bankruptcy, an amount equal to its annual revenue.
The union’s protests over executive bonuses reveal a lack of perspective. While it is unseemly for executives to take pay raises while calling for workers to accept pay cuts, the amounts at stake are trifling: less than $2 million, about a thousandth of the company’s pension shortfall.
Throughout the second bankruptcy the unions have insisted on keeping the pensions in place. While the company needed to restructure the entire retirement scheme, the unions offered only a temporary pension contribution holiday. This would mean even larger unfunded pension liabilities later on.
All of this shows that Hostess has labor problems that are far larger, and go back much longer, than one stubborn union and one difficult contract. The hedge funds and private equity managers that direct Hostess Brands may not be angels, but they are not fools either; they do not succeed by driving companies into serial bankruptcies. The unions at Hostess, by contrast, are likely to ruin the entire company by stubbornly refusing to accept the fact that its defined-benefit pension is unsustainable. And it would appear that it takes more than two bankruptcies for them to understand economic reality.
The mindset of the unions at Hostess is disturbingly similar to that of unions representing state employees. It is to be fervently hoped that the state can avoid Hostess’ fate.
[10.23.12 Update: Roughly 15,000 workers were expected to lose their jobs immediately, and most of the remaining 3,200 would be let go within four months.]