For many companies, bankruptcy is an opportunity to gain some breathing space, refinance debt and move on. Most airlines have been through bankruptcy at least once, and many other companies in operation today once had to seek protection from their creditors. It's not often that major companies choose the route of liquidation, but on Thursday, Hostess, the maker of well-known baked goods like Wonder Bread and Twinkies, announced that it was doing precisely that.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

How Did We Get Here?
In January of this year, Hostess sought bankruptcy for the second time in less than eight years, as it owed more than $1.4 billion in various debts and obligations, including almost $1 billion in pension obligations to the Bakery & Confectionery Union & Industry International Pension fund. While the company reported nearly $1 billion in various plant assets, the company had long struggled to make sustained profits and cash flow from those assets, and the company struggled through numerous leadership changes over the years.

Certainly, management deserves some of the blame here. Hostess had numerous changes in its senior management, and lacked a strong roster of talented baking industry veterans. While the company had much-loved brands and the second-largest share in the U.S. market (after Grupo Bimbo), management couldn't find a way to make sustained profits with that. What's more, companies like Bimbo, Flowers (NYSE:FLO), Mondelez (Nasdaq:MDLZ) and Campbell Soup (NYSE:CPB) were outmaneuvering the company with new product development and in-store promotion activities.

Nevertheless, the final straw would seem to be an unsustainable employee cost structure. Hostess got a bankruptcy judge to sign off an adjustments to union contracts that would cut wages and benefits by about 30%, but the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) refused to go along and went on strike. In response, management warned that if the strike continued, they would be forced to liquidate the company. While the Teamsters Union warned the BCTGM that the company's management was not bluffing (and was indeed in an untenable state), the BCTGM refused to budge and Hostess management opted for liquidation.

SEE: Distressed Debt An Avenue To Profit In Corporate Bankruptcy

What Happens Now?

With Hostess electing to go into liquidation, what happens next is basically an auction process, where the company's hard assets (such as plants and machinery) and brands/recipes will go to the highest bidder(s).

Successful bidders are not required to take on the employees, so a bidder could acquire brands like Twinkies and HoHos and manufacture them in existing plants - offering no relief for the 18,000 or so workers who will now be out of work.

Although there would seem to be a lot of overlap between Bimbo's products and Hostess, I'm not sure Bimbo will make a bid. Bimbo tried to acquire Hostess during the prior bankruptcy and ultimately ended up acquiring Sara Lee's bakery operations. Adding Hostess would boost its market share to around one-third to 40%, and that may be problematic for some regulators (and retailers like Wal-Mart (NYSE:WMT) couldn't be too happy about it either).

Flowers, Mondelez and Campbell Soup could also be options, and I could perhaps see Kellogg (NYSE:K) having some interest in adding the snack cake brands to its existing Keebler operations. Similarly, I wouldn't be surprised to see the Hostess brands broken up - it would surprise me if Kellogg or Mondelez wanted the fresh bread operations, for instance.

SEE: An Overview Of Corporate Bankruptcy

Did This Have to Happen?
Looking through some of the details of this announcement, I really have to question whether this whole situation was necessary. In particular, I have to wonder about the agenda of the BCTGM union.

What may not be commonly appreciated is that the large pension fund obligation is not at risk; Hostess was part of a multi-party pension plan where others must take on the liability if a member goes bankrupt. As a result, Bimbo will be on the hook for roughly one-quarter of the pension liability, with Mondelez responsible for 15%, and Safeway (NYSE:SWY) and Kroger ( NYSE:KR) collectively responsible for another 15% or so.

So at least insofar as the pension was concerned, the union knew that money wasn't at risk. What's more, while I appreciate the anger and frustration of workers asked to take another 30% hit to wages and benefits due to management's mistakes, I have to ask whether it's better for these 18,000+ workers to have a job that pays 70% of what it paid before or no job at all and lose 100% of their pay (particularly right before Christmas). After all, this isn't an economy where 18,000 workers can easily be reabsorbed. In any case, the workers had their chance to vote and they made their decision.

The Bottom Line
Here again we see an example where even great brands cannot protect a company indefinitely. While it's almost impossible to think that Twinkies and other popular snack cakes won't re-emerge under somebody else's umbrella, the Hostess saga is a painful lesson in how changing industry dynamics along with uncompetitive cost structures and incompetent management can destroy even an otherwise strong collection of brands.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  4. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!