Twilight of the Twinkie?

Published in CSP Daily News

Hostess brands preparing for another bankruptcy filing

IRVING, Texas -- Hostess Brands Inc. is preparing to file for Chapter 11 bankruptcy protection as soon as this week, people familiar with the matter told the Wall Street Journal. The move  would mark the second significant court restructuring for the Twinkies and Wonder Bread baker in the past several years.

The privately held Irving, Texas, company carries more than $860 million in debt and has been facing a cash squeeze amid high labor costs and rising prices for sugar, flour and other ingredients, said the report. Those costs together have proved higher than the company's roughly $2.5 billion in annual sales.

Hostess also owes more than $50 million to vendors, which have been demanding payments on shortened time frames because of Hostess's financial condition, one of the people told the newspaper.

Hostess's filing would mark what is known as a Chapter 22 proceeding in restructuring circles, since the company had already sought bankruptcy protection once before, the Journal said.

Hostess, previously called Interstate Bakeries Corp., slashed debt and costs during a four-year stint in bankruptcy court that began in 2004. The company has struggled since emerging from bankruptcy proceedings in February 2009.

The company's private-equity owner, Ripplewood Holdings, invested $40 million in Hostess last year. Hedge funds Monarch Alternative Capital, Silver Point Capital and others loaned the company $20 million late last year.

Hostess has lined up around $75 million in debtor-in-possession financing to keep the company afloat during bankruptcy proceedings, the people familiar with the matter said. Monarch, Silver Point and some other investors have agreed to extend the bankruptcy financing, with an option for other senior creditors to provide parts of the loan, the people said.

Once in bankruptcy court, Hostess will try to reduce debt and renegotiate labor contracts, many of them with the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, the people said. Hostess plans to file court papers soon threatening to reject or modify labor contracts under applicable bankruptcy rules, they added. Such moves provide troubled companies a bargaining chip to try and get concessions from unionized workers.

Sales of Hostess's signature Twinkies have recently declined a bit while the overall bakery snacks category has been about flat, the report said. Nearly 36 million packages of Twinkies were sold in the year ended December 25, down almost 2% from a year earlier, according to the report, citing data from SymphonyIRI Group, Chicago. The data captures sales from supermarkets, drugstores, mass-market retailers and convenience stores, but exclude sales from Wal-Mart and club stores.

Hostess also has had trouble attracting consumers who have migrated away from white bread to whole grains and other healthier foods. Hostess released a whole-grain bread called Nature's Pride, but it hasn't sold well compared with some rivals amid a small presence on shelves,  Mitchell Pinheiro, a Janney Montgomery Scott analyst, told the paper. Still, Nature's Pride's overall sales have ticked up, increasing 12.3% over the past year or so, a Hostess spokesperson told the Journal.

One of Hostess's challenges will be to avoid liquidation, the paper said. The company also hopes that in bankruptcy it can attract new capital to bring production and distribution operations up to date, one of the people said.

Interstate Baking Co., the name Hostess used to go by long ago, was formed in 1930. Some brands Hostess still sells, including Drake's cakes, predate the company.