The Breakdown

Explaining Southern California's economy

Hostess bankruptcy: It's the trouble with Twinkies

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32361 full

Don't worry: the Twinkie supply won't dry up. Hostess Brands, however, is filing for Chapter 11 bankruptcy for the second time in the past decade. Last time around, it set a record for languishing in restructuring. And even though a bankruptcy double-dip is never a good thing, Hostess' investors have enough confidence in the ongoing strength of the Twinkie-and-Wonder Bread market to produce additional financing.

Hostess, like a lot of companies that have been around for a while, has both a debt and a legacy cost/union problem. Total debt is "more than $860 million," according the Wall Street Journal. The pension plan is underfunded by $2 billion and fairly complicated, to boot, covering far more than employees than actually work for Hostess. And the union contracts...well, Chapter 11 will provide the excuse to renegotiate them.

But for the record, Hostess is insisting that it was the rising cost of flour and sugar that pushed it into bankruptcy. If that sounds like a bit of a smoke screen, that's because it probably is. This is a company that's owned by a combination of private-equity firms and hedge funds. They play hardball and won't balk at taking their case to court if the unions won't cooperate. 

But there's yet another wrinkle here. Do people actually want to eat what Hostess is selling? Both Twinkies and Wonder Bread, just to name two of the company's better-known products, are losing customers, as folks concentrate on healthier living. OK, Hostess still sold an astonishing 36 million packages of Twinkies, according the WSJ. But that wasn't enough, given that it represented a 2 percent decline from 2010.

Hostess' last bankruptcy (when it was known as Interstate Bakeries) provided an opportunity for financial players to fight over control of the company. This time around, the bankruptcy looks more strategic — a way to rebalance costs so that more of the company's $2.5 billion in annual sales can be more creatively deployed.

When Hostess went into Chapter 11 in 2004, it took until 2009 for the Twinkie-maker to emerge. It's safe to assume that with no new investors fighting for the future of the company, bankruptcy will be quicker in 2012.

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