Back in the 1980’s, most of the normal kids that I knew settled down in front of the boob tube in their pajamas to watch ABC's Saturday Morning Cartoons. Without fail, every seven minutes our animated programming was interrupted by a cast of animated pitchmen drawn and voiced to sell their "part of a balanced breakfast," and other sugary delicacies. Breakfast cereal aside, the real kings of childhood confections in my day were the Hostess brand snack cakes.
Our impressionable imaginations were dazzled by the likes of Twinkie the Kid who enjoyed all kinds of 30-second adventures with his animated friends, Captain Cupcake, King Ding Dong, Fruit Pie the Magician, Happy Ho Ho, and Chauncy Choco-dile.
In the school lunch room, I was one of those little grubbing misers: a kid whose mom did not pack his lunchbox with junk food. Always the Hostess brand cakes were the most desired over the knock-off brands, and I had to beg or barter to get my hands on any hydrogenated creme filled goodness. Even more prevalent than these snack cakes were the obligatory peanut butter and jelly sandwiches, oozing out their stickiness from between two slices of Hostess Wonder Bread.
When I entered junior high school, I started to receive a stipend for the hot lunch cafeteria. Here, there was always a mad dash for the coveted Hostess chocolate pies. As I grew into manhood and realized that my beloved pies packed a whopping 500 calories, I cut back on my Hostess habit. Yet, when milling about a convenience store, I have never stopped regarding Hostess as the "premium" brand and all others (unless we are talking about Nutty Bars) to be knock-offs.
Yes, my childhood was sponsored by Interstate Brands, owners of the Hostess name as well as many other baked goods until 2012. In November of this year, a federal bankruptcy Judge gave permission for the baking giant to liquidate their assets. While the future of the dozens of facilities and thousands of employees are in perilous uncertainty, the flagship name brands will in most likelihood not remain off the shelves for long.
The origin of the Hostess name goes back to the Taggart Bakery of Indianapolis, Indiana which was founded in 1869 by Alexander Taggart. They enjoyed a local distributorship for bread and crackers in the region and operated several stores and lunch counters in Indianapolis. The Joseph Taggart Baking Company, was operating 19 ovens at 18 New Jersey Street, and had become the largest bakery in the state by 1919 when they started producing the “Hostess CupCake”. In 1921 they introduced the iconic Wonder Bread brand. Four years later Taggart Bakeries, Wonder Bread and the Hostess name were acquired by the Continental Baking Company.
The Continental Baking Company was consolidated from a number of smaller bakeries as United Bakery in 1924 by William Ward whose grandfather had started New York city's Ward Baking Company in 1894. With the acquisition of Taggart Bakeries and Detroit's Wagner Baking Company, the Continental Baking company had become the nation’s largest, distributing Wonder Bread and Hostess brands nationally from network of bakeries thorough New England and the Midwest. In one of these acquired bakeries, the Twinkie snack cake was invented.
Twinkies were invented in Schiller Park, Illinois in 1930 by a baker (James Dewar) for the Continental Baking Company. When strawberries were out of season, the machines used to make the cream-filled strawberry shortcakes sat idle. So, one of the bakers decided to create a snack cake filled with banana cream, which he decided to call the Twinkie. During World War II, bananas were rationed so the company switched to vanilla cream. The Hostess plant stayed open in Schiller Park until the company's unfortunate closing. The plant had the capacity to produce 106 million Twinkies a year.
The business of baking and distributing baked goods had by the nineteen-thirties become the competitive marketplace increasingly dominated by large conglomerates. The same factors that resulted in the recent failure of Interstate Brands were in place back then as illustrated by the following Lehman Brothers archive,
"The bread and cake business was highly competitive. Depending on the locality, the company and its baking subsidiary faced competition from other large baking companies, from the neighborhood bakeries and from chain stores, many of which operated their own bakeries. Price competition was also severe from chain stores operating their own bakeries. Additionally, the competition in all localities from products baked in the home was also present...Substantial increases in bread prices occurred in the latter part of 1946 upon the release of price control that had been in effect during World War II, and again in the spring of 1952 when controls in effect during the Korean hostilities were modified to permit an increase. The cost increases resulted in reduced profit margins despite the various price increases in the products."
In 1950, the Hostess Cupcake got a makeover. The original CupCake released in 1919 was only a chocolate cake with a chocolate frosting. D.R. "Doc" Rice revamped the plain pastry with its now signature vanilla crème filling and seven distinct white icing squiggles on top of the chocolate icing. The Food Network produced a great video  of Hostess Cupcakes being made the "Doc" Rice way. Hostess began to add creme filling to other products at this time such as the Sno Ball. The Hostess Sno Ball was a baseball shaped devil’s food cake, filled with vanilla creme and covered in marshmallow and coconut shavings. The Sno Ball was released three years earlier with out the creme filling in 1947.
The psychedelic sixties were not so sweet for Continental Bakeries. In 1960 the company suffered a judgment against them by the Federal Trade Commission which stated that Continental had "violated the Clayton Antitrust Act...and the Federal Trade Commission Act...by various acquisitions which, 'may have the effect of substantially lessening competition or tending to create a monopoly.'" This was not the first anti-trust judgment against the company, which was in 1926, but it proved to be Continental's last as an independent entity.
In 1968, Continental was bought out by the conglomerate ITT Corporation. Under this new ownership, Hostess released two more of their now iconic brands the Hostess Ding Dongs and the Hostess Ho Hos in 1967. The Ding Dong was a hockey puck shaped pastry, with a creme filling completely surrounded by a chocolate shell. The Ho Ho was Hostesses take on a chocolate Swiss roll. The Choco-dile, a sort of chocolate covered Twinkie, was released in 1975.
In 1970, Hostess launched their marketing campaign which paired each of their products with the animated spokes-characters that I recalled so fondly of my youth. These characters were created by Don Duga and were featured in a variety of animated advertisements through the seventies and eighties.
Besides Twinkie the Kid, who has yet to be retired, the last character to be removed was Fruit Pie the Magician from the Hostess Fruit Pies. Fruit Pies were half-moon shaped fried and glazed pockets that have been available with a variety of different fillings such as cherry, apple, lemon, strawberry, blueberry, chocolate pudding, and vanilla pudding. I have been unable to verify the date that Fruit Pies were first introduced.
In 1984 ITT divested the Hostess brand to Ralston Purina for a whopping $485 million. Despite the predominance of Hostess products in my grade school lunchroom, the Ralston Purina years found the Hostess brand undergoing a slow decline. If long time Hostess fans felt suspicious that their favorite snacks were shrinking, they were right! The size of most of Hostess snack cakes had been reduced to reduce costs. After only nine years and another anti-trust judgment, Ralston Purina announced that they would sell Hostess, which now included the Drake's line of pastries, to Interstate Brands for $220 million and $241 million worth in common stock.
Interstate Brands, based out of St. Louis, Missouri had a history which paralleled that of Continental Bakeries. Interstate's flagship lines were Butternut Bread Sunbeam Bread and Dolly Madison snack cakes. Upon the announcement of proposed merger, the United States Department of Justice motioned to block it. To satisfy the courts, Interstate agreed to divest itself of several of its operations and assets and agreed to license the productions of other brands to its competitors in a 1996 decision.
Notable among these agreements were the licensing of Butternut and Sunbeam to Lewis Brothers Bakeries in territories in Illinois and the production of Wonder Bread in southern California to subsidiaries owned by Bimbo Bakery in Mexico. Interstate Brands was subsequently held in contempt for violating the latter agreement in 1999. 
In 2000 the supply of Hostess products was interrupted during a labor dispute with the Teamsters Union. As the Teamsters went on strike, former Continental bakeries throughout the east closed as 5,000 workers walked off their jobs. "The great Twinkie famine of 2000" saw hostess snack cakes selling on Ebay for thousands of dollars.
Interstate Brands reversed the physical downsizing of Hostess snacks, restoring them to their original sizes. But despite their good intentions towards their consumers, the new baking giant was failing for a variety of reasons.
"Today Hostess, with headquarters near Dallas, has a workforce of roughly 19,000, 83% of it unionized, in 36 plants and more than 500 distribution centers across the country. The Balkanized nature of its empire gave Hostess a piecemeal labor situation, including a matrix of 372 collective-bargaining agreements, a dozen separate unions, 5,500 delivery routes, and no fewer than 40 multi-employer pension plans that are despised by management. While many Americans kept on eating their much-loved Hostess products, the company's income statement was doing less well. Its fixed-cost structure was a mess. Labor had successfully negotiated generous pensions and health care benefits, but they were out of line with shifts in the marketplace. Hostess sales declined...as the company had roughly $450 million in debt by 2004. In September of that year, Hostess declared bankruptcy. "
With their workers' compensation reserves were under federal investigation and under Chapter 11 bankruptcy protection, Interstate Brands borrowed $200 million from JP Morgan Chase to cover salary and supply expenses. Under Chapter 11, hedge fund "specialists" in distressed companies, such as Silver Point Finance LLC and Monarch Master Funding Ltd bought secured debt at discounted prices. New investments were secured from Ripplewood Holdings and General Electric Capital Corporation in trade for controlling interest in the company. The Teamsters Union and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union agreed to concessions which saved International Brands $110 million annually, while costing thousands of union members their jobs. After winning an extension in 2007, a new private company finally emerged from bankruptcy re-organization on December 5, 2009 as Hostess Brands, with all of Interstate Brands common stock canceled and valueless.
On the eve of a new decade, Hostess Brands was burdened with $670 million in debt and hamstringed by cumbersome and ineffective labor agreements with the unions. Their main competitors, Flowers Foods and Bimbo Bakeries USA, enjoyed much more favorable business conditions in these two measures. Grupo Bimbo acquired Sara Lee from Kraft Foods in 2010, strengthening their portfolio against Hostess. Worse, the company offered little real innovation in a marketplace increasingly focused on healthy alternatives to the foods that Hostess Brands were staking their fortunes on. All this, combined with the lack of financial liquidity and the high unemployment of the great recession, was a recipe for failure.
"Sales were down about 11% from 2008 and down 28% from 2004. Overall, Hostess lost $341 million in fiscal 2011, 2½ times the loss of the prior year, and by early 2012, primarily because of burgeoning interest obligations, its debt had grown to about $860 million....Hostess filed for Chapter 11 protection again, in January of this year (2012). This time, though, the moneymen were no longer on the same page. As the majority equity holder, Ripplewood badly wanted to keep Hostess out of bankruptcy. It pleaded with the lenders to show flexibility, but they were not so inclined. They lenders held superior fiscal hands and had less downside if Hostess failed. In the event of a bankruptcy, given all the assets Hostess owned, the lenders would still walk away with millions. ...They turned to the unions and demanded new concessions. But the unions, having three years earlier given up thousands of jobs and millions in benefits, flatly refused"
As Hostess re-entered bankruptcy, one of their key objectives was to reduce or repeal their obligations to fund their unions' pension funds through a procedure known as code 1113. Hostesses obligations had exceeded $100 million annually. On April 18, 2012 this motion was granted but Hostess and their unions continued to negotiate as the BCTGM union members voted to strike. To further add insult to the union's grievances, Hostess filed a motion with the bankruptcy judge to guarantee Driscol a $1.5 million annual salary with a $1.95 million non-compete clause even if Hostess were liquidated. When Ken Hall, treasury-secretary of the Teamsters Union, threatened to break off negotiations if the motion was not withdrawn, CEO Brian Driscoll abruptly fled.
Hostesses new Ceo, Greg Rayburn, was left to deal with the bad publicity and to preside over the legal circus with the hedge funds on one side with their secured debt and the unions at the other with their unsecured pension obligations which had been given the green light to be terminated. On August 14, 2012 Rayburn submitted Hostesses final proposal to the unions which the Teamsters agreed to but the BCTGM rejected by 92 percent. BCTGM president Frank Hurt published,
“Contrary to CEO Rayburn’s disingenuous and erroneous public comments, our members did not reject this proposal because of ‘bad information’ from the International Union. They rejected it because it was an outrageously unfair proposal from a company that has destroyed the trust of its workers through years of mismanagement, greed and unfulfilled promises...Our members have seen this company squander more than $50 million that it was contractually obligated to put towards our members’ pension. They have seen the company fail to invest in product development and new plant and equipment as was promised when the company emerged from its previous bankruptcy and for which our members made significant concessions...Our members reviewed the analysis of this company’s business plan provided by a highly-respected financial analyst retained by the company which showed that the plan has little or no chance of succeeding in saving the business but would provide the investors with a windfall...We encourage Hostess Brands to pay the $50 million in pension contributions it owes our members and come to the bargaining table with a fair and reasonable proposal for its workers and a legitimate business plan that provides the foundation for a future world-class wholesale baking company and not fatter bank accounts for Wall Street investors.”
In turn, Hostess filed a motion with Bankruptcy Judge Robert Drain to cease operations and liquidate their assets including 36 bakeries, 242 depots, 216 retail stores, 311 sales facilities, and 58 other leased or owned sites used for storage, warehousing of products or parking. Judge Drain stated, “I’m giving the union as well as the debtors and their lenders a last chance to try and work those issues out in private, and cited “serious questions as to the logic behind the decision” (for the union) to strike.
The mediation was "unsuccessful" and on November 21, 2012 Judge Drain approved this motion. 18,500 Hostess employees were fired immediately to start the process of collecting benefits. On November 29, 2012 Judge Drain finalized his judgment. 19 Hostess executives who will oversee the liquidation will receive a total of $1.75 million in bonuses ranging from $7,400 to $130,500, provided they meet certain benchmarks in managing the liquidation. 3200 Hostess employees remain on the payroll until the liquidation is complete.
The union rank-and-file are out in the cold. The badly underfunded pensions will dry-up quickly. Even with the union pension obligations revoked, the debt burden of Hostess Brands is staggering. This is not dissuading over a hundred suitors who are interested in a piece if not all of the Hostess Brands pie which generates $2.4 billion in annual sales. Financial analysts speculate that the total sale of Hostesses assets could conservatively exceed $1 billion. Yet even this figure is eclipsed by the $850 million in secured debt to financiers, the $180 million in accrued workmans’ compensation liabilities, the $75 million in debtor-in-possession loans, the $50-60 million in unsecured debts to suppliers and the $36 million in outstanding lease agreements.
The hedge fund managers and related investors in secured debt, or course, are going to get paid off the top of any sales. For the rest waiting for scraps, such as the suppliers, the vendors, the retailers, and the service providers, they might find their checks at the end of the Hostess Brands final bake sale to be as empty as the shelves where the Twinkies, cupcakes and Wonder bread used to be.
For a business proposition quest 2012
HOSTESS IS CLOSED