Twinkies maker Hostess, union head to mediation

• Twinkies producer Hostess Brands and unions agree to mediation
• Bankruptcy judge cites questions about union strike rationale
• Court seeks compromise to save 18,500 jobs

Twinkies live on — at least for one more day under Hostess Brands ownership.

The bakery giant and its labor unions have agreed to a Tuesday mediation session over a crippling labor strike the company cited as the final trigger for the emergency shutdown Hostess began last week.

The temporary reprieve in the labor-management standoff came in a White Plains, N.Y., hearing Monday in which U.S. Bankruptcy Court Judge Robert Drain questioned the rationale for the strike by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

Drain cited "serious questions" about the strike because the union rejected Hostess' latest contract offer without filing an objection to it or discussing the possibility of going to mediation. The union represents about 5,000 of the company's 18,500 workers.

Founded in 1930, Texas-headquartered Hostess is one of the nation's largest bakers and wholesale distributors of snack cakes and bread. Besides cream-filled golden Twinkies, its products include such iconic brands as Ding Dongs, Ho Hos and Wonder bread.

But even as it produced and distributed those still-popular brands, the firm faced more than $1 billion in debt, costly labor union contracts, management criticism and changing U.S. consumer tastes.

Those issues prompted Hostess to file a motion Friday arguing that the normal Chapter 11 reorganization it has been pursuing since January — the firm's second bankruptcy procedure in recent years — was insufficient for the firm's survival.

Instead, court records show Hostess sought approval for a one-year emergency shutdown that would:

• Create a bonus pay plan for 19 corporate officers and high-level managers and some non-senior employees who would carry out the shutdown.

• Authorize hiring of third-party contractors for security, accounting and other services needed for the closing.

• Provide legal protection against potential lawsuits for company directors and officers who either developed the shutdown plan or would implement it.

• Give asset-based lenders priority for repayment over other company creditors.

• Allow expedited cancellation of unwanted contracts and unexpired leases.

• Permit non-consensual use of cash collateral provided by some of the firm's creditors.

In court papers, Hostess said it has struggled with "an inflated cost structure" that has put the company "at a profound competitive disadvantage."

The costs largely stem from union labor contracts that have "never been meaningfully addressed" or modified, the company contended. Without such changes, "Hostess simply cannot emerge as a viable competitor," the firm said.

But the company's 12 unions argue that Hostess' problems are largely of its own making.

Corporate missteps include "years of underinvestment in products, facilities and equipment, long-term neglect of once-dominant brands and hollowing-out of a distribution system that once provided a competitive advantage," wrote Henry Wilson, a financial executive who analyzed Hostess for a provisional labor management committee created by the company and the Teamsters union.

Wilson's conclusions, filed with the bankruptcy court in March, also cited failure to develop newer, higher-growth products, an overly compliant corporate board and a "grossly overleveraged" debt structure with Wall Street lenders that was imposed during the company's prior bankruptcy.

U.S. Bankruptcy Trustee Tracy Hope Davis joined Hostess unions in opposing the firm's shutdown plan. In a court filing, Davis criticized the provisions that would "grant bonuses to insiders" and "cherry-pick" which administrative claims get paid.

Davis wrote that the case should be converted from a reorganization to a Chapter 7 procedure. That would authorize a bankruptcy trustee to liquidate Hostess and distribute the assets in accordance with the U.S. Bankruptcy Code priority scheme.

Contributing: The Associated Press, Bloomberg News