As noted in Steve Mufson's excellent
summary in today's Washington Post (made all the more excellent by having
quoted me!), the iconic Hostess Brands fell into bankruptcy yesterday. As
with every bankruptcy case, the best summary is found in the "first
day affidavit" of the company's leading executive, in this case
Brian Driscoll, Hostess' CEO and board member. From it, we learn that
Hostess was founded in 1927 and went on an acquisition spree over the next 60
years to amass 36 bakeries, 565 distribution centers, 5,500 delivery routes,
and 570 bakery outlet stores in the US. We also learn, not surprisingly,
that it operates in a "mature industry with high levels of competition and
related pricing pressures, thin operating margins, and competitors with more sophisticated
technology and significant cost advantages."
As most people know, that mature industry with razor-thin
margins also led Hostess to file bankruptcy in 2004 under the name Interstate
Bakeries Corporation (IBC). That bankruptcy languished for 4 years, with
liquidation often considered a real possibility. But the parties
eventually worked through the differences in hard-fought negotiations and
Hostess emerged in early 2009 with a new name and a new capital structure
("4 tiers of secured debt ... of $860 million"). Unlike the
government sponsored bankruptcies of Chrysler
and GM that
followed in short order, however, the bankruptcy effectuated no changes in
Hostess' legacy costs. Mr. Driscoll's first-day affidavit says Hostess
won't make that mistake this time around.
Why did Hostess' plan fail? Well, it was losing
$150 million a year going into confirmation in 2008 and wasn't
projected to start generating real net income until fiscal year 2012.
Based on the financial projections, it seems the dream of the reorganization
team (which lost a lot of money on this bet) was to turn the company around in
five years, generate about $150 million in "EBITDA," and
sell the reorganized company at some multiple of EBITDA to the next pipe
dreamer at a number that would get debt and equity investors out whole, perhaps
even with a modicum of profit.
But, as Robert Burns waxed poetically in 1786--later
popularized by John
best laid schemes of mice and men gang aft a-gley [often go awry]."
Instead of generating sales of $2.9 billion in FY 2011, it only generated $2.5
billion. Instead of losing $34 million and $9 million in FY 2010 and
2011, respectively, it lost $138 and $341 million. Highly leveraged, with
interest costs of about $60 million a year, Hostess ended up collapsing like a badly
Here's the full plan
statement from Hostess' 2008 reorganization for those wanting to read the
gory details of its first extended trip into bankruptcy.
Based on the restructuring plan outlined in Mr.
Driscoll's affidavit, Hostess' second trip into bankruptcy won't be as
extended, but certainly will be contentious.
Thanks for reading!
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Bankruptcy Litigation Blog
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