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3Qs: Bitter taste for an American treat?

Last week Hostess Brands — which makes iconic foods such as Twinkies and Wonder Bread — announced that it is going out of business and filed a motion with the U.S. Bankruptcy Court seeking permission to close its business and sell its assets. The move, which comes after a costly labor dispute, means that some 18,500 Americans will lose their jobs. However, a judge on Monday ordered Hostess into mediation with union workers. We asked Harlan Platt, professor of finance in the D’Amore-McKim School of Business, to weigh in on the situation and what it could eventually mean for some of America’s most beloved brands.

What’s your reaction to Hostess Brands’ initial bankruptcy filing, and then a judge’s order for the company to go back into mediation? Are these two moves unprecedented?

The situation at Hostess is very unusual. Something similar occurred in 1991 at Eastern Airlines, which first had a strike by its unions and then later the company filed for bankruptcy. In both cases a strong union did not feel adequate pressure to compromise. One might argue that this is still a protracted negotiation; that is, a settlement may still be reached. The leverage has decidedly switched over to the management position as a result of their not capitulating to a crippling strike. That is no guarantee that a deal will be reached, but I think the behind-the-headline discussions must have included a request from the union force management back to the table.

What were some of the main problems that initially led to Hostess’ bankruptcy filing? And should this situation still play out, what would the economic impact of potentially thousand of lost jobs?

Many of the problems are work-rule related. For example, the Hostess truck that carries bread is not permitted to also carry cakes. Likewise, a Hostess truck carrying cakes may not carry bread. Forcing the company to have twice as many trucks and drivers is a sure way to push it into bankruptcy. I would expect at this point that if a deal is reached that these arcane rules creating enormous inefficiencies will be relaxed, allowing Hostess to cover its costs and possibly earn a profit.

Another scenario might be what’s called a 363 sale, in which a bidder buys Hostess’ assets without including the union or its workers in the deal. This is similar to what occurred at both Chrysler and General Motors. In that case, I suspect that a nonunion baker would cherry-pick among the assets and continue production of the most profitable Hostess items at a far lower cost without any diminution in quality.

The impact of these job losses on the economy would be substantial. The lost jobs as a result of the liquidation would be equal to 10 percent of the new jobs created in the entire economy in the month of October. Clearly this would be a setback not just for the affected workers but for the economy as a whole.

So, what will happen to Twinkies? The world needs to know.

I would speculate that no matter what happens, Twinkies and other Hostess brands will survive. Someone will come along and purchase intellectual property, at a minimum, and restart the production of this American iconic food. If this scenario works, I would expect that a great deal of time and energy will be devoted to the question of whether the new Twinkies are equal to the old Twinkies.

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