Hostess, union to give mediation one last try. Can Twinkies be saved?

As Hostess Brands tried to convince a New York bankruptcy judge to help the company shut down its business Monday – a move expected to put 18,000 employees out of work – the maker of Twinkies and other iconic American snacks was asked to participate in one final mediation session with the union to prevent it from shutting its doors for good.

Judge Robert Drain of the US Bankruptcy Court in White Plains, N.Y., asked attorneys representing Hostess and the Baker, Confectionary, Tobacco Workers and Grain Millers’ International Union to participate in mediation Tuesday.

If the talks prove unsuccessful, Judge Drain said, the bankruptcy motions will resume Wednesday.

“To me not to have gone through [mediation] leaves a huge question mark over this case, which I think – I may be wrong – but I think will only be answered in litigation. And that’s no one’s desired outcome,” he said.

The mediation session Tuesday will be confidential, but Drain said representatives from the International Brotherhood of Teamsters and representatives from Hostess’s creditors could attend.

Hostess arrived in bankruptcy court after saying that a week-long strike by the bakery union, which began Nov. 9, gave them no choice but to liquidate assets. At stake are 36 bakeries, 242 distribution depots, 216 retail outlets, and 311 other facilities. Three days into the strike, the company, based in Irving, Tex., permanently closed three plants in St. Louis, Cincinnati, and Seattle.

Hostess and its employees had a history of contentious relations. The company had long complained that the costs of maintaining a unionized workforce prevented it from growing; in January, it filed for Chapter 11 bankruptcy protection for the second time in less than a decade. A new contract that the company was seeking to impose would have slashed its pension costs from $100 million to $25 million annually, cut wages, and reduced health benefits by 17 percent.

The union says the company has suffered from eight years of failed management that refused to modernize its facilities or invest in product development or advertising and marketing, plunging the company deeper in debt. Bakery union leaders also say the company was losing money by maintaining executive bonuses, including elevating the salaries of at least a dozen executives by between 35 and 80 percent last year, and by enriching owners of a private equity firm and hedge funds.

Tuesday’s mediation session is intended as a last-ditch attempt to reboot the company and save jobs, but it may be the case of too little, too late. Hostess has said that the bakery union has refused to negotiate with the same spirit of other labor organizations, such as the Teamsters, which agreed to wage cuts in exchange for about 25 percent of the company’s stock.

On Monday, Hostess attorney Heather Lennox told Judge Drain that last week’s strike permanently crippled the company. “At this point … our customers know we’re going out of business. It would be very hard for us to recover from this damage … even if there were to be an agreement in the near term,” Ms. Lennox said.

Bakery union attorney Jeffrey Freund said the union has been “crystal clear” about its terms, which it reiterated “again and again and again and again.”

Dallas bankruptcy attorney Linda LaRue says it is more advantageous for Hostess to participate in the court-ordered mediation session because it will show that it did everything it could to save the company.

“It’s very difficult to have a Chapter 11 case succeed without a successful relationship with the unions and what’s what we’re seeing now. It would behoove them to [enter mediation] despite all the negotiations they’d done, if for nothing else to show a good faith effort. There are thousands of jobs at stake,” Ms. LaRue says.

Complicating matters is the Hostess request to pay senior management incentive bonuses of up to 75 percent of their annual pay to encourage them to continue on for the few months that are needed to wind down the company. In its court filing, the company said the bonuses would amount to as much as $1.75 million. Total costs to shut down the company are an estimated $17.6 million.

That request prompted US Trustee Tracy Hope Davis to file an objection on behalf of the US Justice Department with Judge Drain Monday, requesting that he convert the case to a Chapter 7 from a Chapter 11 because Hostess has “not demonstrated that the insider bonuses are permissible.”

Chapter 7 would involve the court appointing a trustee to the company who would be tasked with liquidating assets without any management involvement or interest in possible reorganization for future buyers.

Sam Stricklin, a partner in the financial restructuring group at Bracewell & Giuliani in Dallas, says Chapter 7 would create “chaos” for the company and its creditors.

“There are less draconian ways to handle things if the concerns are management is being paid too much – the court can shave all of that down,” Mr. Stricklin says. Under Chapter 7, “you’re basically using a nuclear weapon when a pistol would do the trick.”