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Hostess, Bakers Union Agree to Mediation

By JACQUELINE PALANK, RACHEL FEINTZEIG and MIKE SPECTOR
Seeking to save more than 18,000 jobs, a bankruptcy judge surprised Hostess Brands Inc. and its warring union Monday by delaying the company's bid to close its 85-year-old bakery business and sell off its factories, brands and other assets

Instead, Judge Robert Drain asked both sides to join him Tuesday for a mediation session where he will try to broker a new contract. If Tuesday's long-shot session fails, then the company will be able to return to court Wednesday to try to move ahead with its plans to close down.

Hostess had asked the U.S. bankruptcy judge for permission to liquidate, arguing that the bakers union's more than week-long strike had left it unable to produce Twinkies, Ho-Hos, Wonder Bread and other longtime supermarket staples. Hostess said it didn't have the financial wherewithal to continue operating amid the work stoppage.

"My desire to do this is prompted primarily by the potential loss of over 18,000 jobs," the judge said during a hearing in federal bankruptcy court in White Plains, N.Y. He also cited his "belief that there is a possibility to resolve this matter notwithstanding the losses that [Hostess has incurred] over the last week or so and the difficulty of reorganizing this company."

Hostess and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union agreed to the confidential mediation proceedings. If they don't make progress, a hearing on Hostess's liquidation request will resume Wednesday, the judge said. Meanwhile, the company's plants remain closed and potential suitors are circling.

Hostess Chief Executive Gregory Rayburn said the judge's call for mediation is a "forceful" message to the company and the union to try to work out their issues. "We'll take all the help we can get," he said.

Bakers union attorney Jeffrey R. Freund of Bredhoff & Kaiser said after the hearing that the union was "respectful" of the court's request for mediation.

The standoff between Hostess and the bakers union dates back to the company's proposal for wage and pension cuts earlier this year. Hostess's other big union, the Teamsters, agreed to the new labor deal, but the bakers balked.

Eventually, Hostess sought permission under the Bankruptcy Code to impose labor terms on the bakers. The bakers union didn't participate in court proceedings related to Hostess's request, and Judge Drain gave the company the permission it sought in October.

The imposed five-year labor contract included an 8% cut to wages in the first year and pension-plan modifications. On Nov. 9, the bakers walked off the job.

Judge Drain, who was a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP before his 2002 appointment to the bench, said in court Monday he didn't understand why the union didn't fight the labor concessions in court.

"The bakers union did not object to the relief that was sought. I want to repeat that," he said, calling its decision to remain silent when Hostess was on the verge of imposing labor cost cuts "somewhat unusual, to say the least, and perhaps illogical."

Mr. Freund said the union has been "crystal clear" about what it believes needs to be done to make Hostess viable. "We laid that out," he said, "again and again and again and again."

Mediations have become more prevalent in bankruptcies as caseloads have increased and litigation has proliferated in courts, according to Donald Workman, a bankruptcy lawyer at Baker & Hostetler LLP who isn't involved in the Hostess case. Sometimes judges will assign mediators to tackle a number of lawsuits brought within a bankruptcy proceeding instead of hearing them all in an effort to keep cases moving.

Hostess's situation, though, is extraordinary, with the fate of the company hanging in the balance. When it filed for bankruptcy in January, it reported $1.3 billion in debt and $981.6 million in assets as of Dec. 10.

Heather Lennox, a Jones Day lawyer representing Hostess, told Judge Drain Monday that the strike hurt the company's finances beyond repair.

"At this point, your honor, our customers know we're going out of business. It would be very hard for us to recover from this damage, your honor, even if there were to be an agreement in the near term," she said.

Already, potential bidders are circling Hostess, hoping to get iconic brands or other assets on the cheap. Flowers Foods Inc. FLO +1.43%of Thomasville, Ga., whose own brands include Nature's Own bread, ButterKrust bread and Tastykake snack cakes, said Monday it has renegotiated lending terms to allow it to tap additional cash. Analysts see that as a clear sign it is gearing up to buy Hostess assets.

Private-equity firm Sun Capital, meanwhile, is interested in bidding on Hostess's entire business, said a person close to the firm. The Boca Raton, Fla., buyout shop, which owns the Friendly's restaurant chain and specializes in company turnarounds, would like to try to negotiate a deal with Hostess's unions, the person said. Sun's interest was earlier reported by Fortune.

For mediation to succeed, Judge Drain would have to get the bakers to agree to go back to work, and get Hostess to tweak its labor-contract proposal in a way the union can accept, Mr. Workman said. "He's going to strong-arm both sides to get to some place where they can be comfortable," he added.