Question

two questions are base on Hostess Brands Liquidates in Bankruptcy

1. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7 liquidation, or a Section 363 sale? What factor(s) drove Hostess into a Section 363 sale? Which party tends to have the greater advantage: the strategic or financial bidder in a 363 sale and why?

2. Comment on the fairness of the 363-auction process to Hostess shareholders, lenders, employees, communities, government, etc.  Be specific.

Answer 1

Hostess Brands has now shut down and is going into final bankruptcy liquidation, killing 18,500 jobs and selling off its factories, brands and other assets. Yesterday bankruptcy judge Robert Drain had management and labor join him for a last mediation session aimed at brokering a new contract, but the session was abandoned last night.

As the popularity of junk food faded a decade ago, the company, which stretches back 82 years, struggled with rising labor and commodity costs. It filed for bankruptcy for the first time in 2004.

In 2009, it came out of bankruptcy under the name Hostess Brands, named for its most popular division. Hostess made an effort to adapt to changing times, introducing new products like 100-calorie Twinkie Bites. But it also had new private equity backers, which loaded the company with debt, making it tough to invest in new equipment. At the same time, the workforce was heavily unionized and had very high labor costs. Hostess had a net loss of $1.1 billion in fiscal 2012, on revenues of $2.5 billion. In January, the company filed for Chapter 11.

But who was ultimately to blame for the company failure? Here at Forbes, Leadership contributor Adam Hartung had a provocative piece on Sunday where he fingered management. In its most recent bankruptcy filing, writes Hartung, the company imposed “draconian cuts to wages and benefits.” This was unrealistic and damaging, he says, “tantamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price.” The company also kept trying to prop up its old business of obsolete products, failing to cook up more palatable foods with higher margins. Then it scapegoated the unions.

Hostess should have picked up on changing consumer tastes years ago, writes Cardello, and begun reinventing its product line. The company could have even kept the iconic Twinkie, which still has its fans, if it had added more nutritional products. Cardello is a former marketing director at Coca-Cola, where he worked when the company introduced Diet Coke in 1983, so he knows of what he writes.

So in the end, why did Hostess die? While I think Hartung and Cardello make compelling points about product innovation, I’m convinced, as Fortune’s Kaplan wrote last summer, that “the Hostess story is a microcosm of larger economic and political issues on the national stage, including the perils of debt and the inertia of unions on workplace reform.” If Hostess had come up with a fabulous, new, healthy product line two years ago, perhaps that would have helped things shift. But the company had $2 billion in unfunded pension liabilities, unions that understandably didn’t want to make further concessions, and two hedge funds and a private equity firm with pressure to get some sort of return on their investments. As Kaplan writes, Hostess had “two root problems—a highly leveraged capital structure that had little margin of safety, and high labor costs.” A line of fabulous new products could not have solved those deep problems.