Down the Drain?

Sometimes the end isn’t the end.

With potential buyers lining up, Bankruptcy Judge Robert Drain sent the baker’s union and management back to the negotiating table. The union thought that management’s threat to go to liquidation was a bluff, that there were would be a white knight behind them to rescue the company if they just held out long enough. But when they began to make liquidation plans in earnest, the union may have had second thoughts. So the Judge is giving them one last chance.

If they can’t come to terms, there are at least three potential buyers. Grupo Bimbo (No, I am not making that name up) is based out of Mexico and is the world’s largest bread-baking company. They own Entenmann’s, Thomas’s English Muffins, and a host of Latin American brands. Flowers Foods used to make Mrs. Smith’s Pies and Keebler’s Cookies, but now produces Roman Meal, Sunbeam, and the Nature’s Own brands. Finally, there’s a private equity firm, Sun Partners, which claims that they could assemble a better deal for the union than Hostess, and still be cash flow positive in year one: that by investing in new technology, they could see a positive impact on the product, the people, and the profitability.

The Hostess brand is iconic. For all the jokes about Twinkies surviving a nuclear holocaust, people buy them by the millions because they like having a sweet, light snack. In spite of all the faddish lo-carb, no-fat, zero-sugar diets, people indulge because, hey, it’s easy. But having a popular product is one thing. Producing, distributing, and selling it profitably is another.

There are all kinds of reasons for unions not to trust management. But if the money’s not there, it’s not there. If this team can’t save the Twinkie, they really are Ding-dongs.

Douglas R. Tengdin, CFA
Chief Investment Officer
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