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Teamsters OK CBA, save Hostess from liquidation

by Jamie Mason  |  Published September 17, 2012 at 2:00 PM
Bankrupt Hostess Brands Inc. avoided liquidation on Friday after the International Brotherhood of Teamsters voted to accept the maker of Twinkies and Wonder Bread's modified collective bargaining agreements.

Even so, the company still faces some obstacles since its Bakery, Confectionery, Tobacco Workers and Grain Millers International Union voted to reject the modified CBA late Sept. 14.

Hostess Brands CEO Gregory Rayburn told The Deal Pipeline the debtor will petition Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York in White Plains to set a hearing on Oct. 3 to enforce the terms of the modified CBA on the union through Section 1113 of the Bankruptcy Code.

If the Section 1113 relief is granted at the hearing, it will enable Hostess Brands to avoid liquidation and successfully emerge from Chapter 11, a company statement said.

"We understood from the Teamster and Bakery union leadership that they wouldn't endorse the offer, but would let the employees decide on the vote," Rayburn said by telephone.

Hostess learned early on that the leadership of the Bakery union was, in fact, actively lobbying against the CBA and telling its employees that there was a buyer for the company and that if the rank-and-file didn't accept the debtor's final offer, Hostess would make a second offer, Rayburn said.

He added that there isn't a buyer for the company and Hostess has been saying all along that it wouldn't be coming back with a second offer.

"The employees were misled on the facts," Rayburn said.

While the IBT voted to accept the new contract, it was only narrowly approved, a statement from the Teamsters union said.

More than 4,400 Teamsters voted in a national mail ballot referendum, with 2,357 voting to approve and 2,043 voting to reject, the statement said.

"This was a difficult decision," said Teamsters General Secretary-Treasurer Ken Hall in the statement. "Our members are frustrated at being in the position to bail out the company again, but overall were willing to accept modifications with the hope that Hostess will recover and be in a better position in the years to come. At the end of the day, our members recognized that they can't replace their pay and benefits in the nonunion sector."

The new agreement includes an 8% reduction in total wages and commissions in the first year of the five-year contract. Wages would then increase by about 3% the following year and an additional 1% in the fifth year of the contract.

The deal also includes revised work rules to increase efficiency and revised health and welfare benefits. Hostess will also withdraw from IBT's multiemployer pension plans and then re-enter into the plans provided they meet certain conditions that limit financial risk to the company. IBT will also be able to appoint two directors to Hostess' nine-member board of directors.

Rayburn couldn't say when the ratified CBA with the IBT would take effect.

The debtor has 19,000 employees, 83% of whom are members of unions covered under 372 collective bargaining agreements. The employees belong to 12 separate unions, but the majority have IBT and Bakery membership.

Hostess has been negotiating with the IBT since its bid to flat-out reject the CBAs with the union was denied on May 14.

According to Rayburn, Hostess will now look to file a reorganization plan in the fall and exit from Chapter 11 by the end of December. In order to fund its plan, it has a commitment for roughly $400 million in first-lien exit financing from its existing debtor-in-possession lenders.

Silver Point Finance LP, Monarch Alternative Capital LP, Gannett Peak CLO I Ltd. and Credit Value Partners LP are providing Hostess' $75 million DIP loan, which requires the debtor to exit from bankruptcy protection by Jan. 11.

The plan would also issue $280 million in third-lien debt with $100 million of that going to the unions, which would also get 25% of the debtor's reorganized common equity, Rayburn said. He added that the plan doesn't contemplate the issuance of second-lien debt.

Hostess, which was founded in 1930, operates 36 bakeries, 565 distribution centers, 5,500 delivery routes and 570 bakery outlet stores throughout the U.S. Its brands include Butternut, Ding Dongs, Dolly Madison, Drake's, Home Pride, Hohos, Hostess, Twinkies, Wonder, Merita Breads and Nature's Pride.

The company first filed for Chapter 11 as IBC on Sept. 22, 2004, in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City. The debtor exited from bankruptcy protection on Feb. 3, 2009.

Hostess filed for bankruptcy protection again on Jan. 11 to effect the "fundamental operational and financial changes that the debtors' businesses require in light of their declining performance, aging infrastructure, strained liquidity levels and excessive debt, and the significant challenges facing the debtors, including, but not limited to, uncompetitive and unsustainable labor and legacy costs and an intensified competitive environment," former CEO Brian J. Driscoll said in court filings.

Since its 2009 exit from Chapter 11, the debtor's financial performance hasn't kept pace with the projections set forth in its reorganization plan.

Corinne Ball, Heather Lennox, Lisa Laukitis, Steven Bennett, Todd S. Swatsler and Robert W. Hamilton at Jones Day are debtor counsel.

FTI Consulting Inc. is the company's financial adviser, while Perella Weinberg Partners LP is Hostess' investment banker.

Thomas Moers Mayer, Philip Bentley and P. Bradley O'Neill at Kramer Levin Naftalis & Frankel LLP represent the official committee of unsecured creditors. Blackstone Advisory Partners LP is financial adviser for the committee.

Richard M. Seltzer, Thomas N. Ciantra and Danya Ahmed of Cohen, Weiss and Simon LLP are counsel to an IBT negotiating committee.

Jeffrey Freund and Zoe L. Palitz of Bredhoff & Kaiser PLLC represent the Bakery union.

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Tags: Bakery | bankruptcy | Blackstone Advisory Partners LP | Bredhoff & Kaiser PLLC | Brian J. Driscoll | CBA | Cohen Weiss and Simon LLP | Confectionery | Credit Value Partners LP | DIP loan | FTI Consulting Inc. | Gannett Peak CLO I Ltd. | Gregory Rayburn | Hostess Brands Inc. | IBT | International Brotherhood of Teamsters | Jones Day | Judge Robert D. Drain | Ken Hall | Kramer Levin Naftalis & Frankel LLP | liquidation | Monarch Alternative Capital LP | Silver Point Finance LP | Tobacco Workers and Grain Millers International Union

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