Monday, November 26, 2012

The Giant Sucking Sound Is Hostess Jobs Moving to Mexico (And Media Give Democrat Private Equity a Pass)

The Giant Sucking Sound Is Hostess Jobs Moving to Mexico (And Media Give Democrat Private Equity a Pass)





English: Hostess Twinkies. Yellow snack cake w...
Twinkies (Photo credit: Wikipedia)
November 21, 2012 was a dark day for us Gen X-ers, who grew up with calorie-rich Twinkies and Ding Dongs in our school lunch boxes. (Nowadays, they would probably be confiscated by the food police, but that is now not then). After a failed mediation, Hostess Brands announced last Tuesday it would proceed with liquidation after 82 years of operations. Its various brands, many of them household names, go on the auction block as Hostess’s competitors, such as Flowers Foods, ConAgra, and Mexico’s El Grupo Bimbo, are poised to pick up Hostess’s iconic Twinkies, Wonder Bread, Ding Dongs, Home Pride, Ho Hos, and Dolly Madison brands.


A successful bid from Grupo Bimbo, the world’s largest baker, means Twinkies labeled “Hecho en Mexico” – the ultimate insult to the American baker and delivery man. News reports claim this result is likely. Twinkies can return as a highly profitable Mexican expat free from U.S. tariff-inflated sugar prices and unions.
The liquidation leaves Hostess’s 18,500  workers, most members of the Teamsters or bakery workers union, out in the cold. They are probably asking: President Obama: Where are you when Twinkies and Ring Ding Juniors need saving rather than Detroit?
Recriminations from organized labor fill the air. Obama ally, Richard Trumka, President of the AFL-CIO, blames “Bain-style Wall Street vultures making themselves rich by making America poor.” In Trumka’s world, high union pay, gold-plated pensions, and restrictive Teamster work rules have nothing to do with Hostess’s demise. No. Hostess was “Bained” by a greedy private equity company, whose goal was to destroy Hostess while making millions for itself and its greedy vulture investors as American “workers pay the price.” No matter what the facts, that is organized labor’s line. Someone else is always to blame.
Trumka’s tirade was designed to  tee up Hostess for a media anti-Wall Street feeding frenzy. But we are still waiting for the screaming headline: “Wall Street Vultures Destroy Iconic American Company for Own Gain.” Despite intensive coverage of the Hostess bankruptcy, the mainstream media has largely given the private equity company that took control of Hostess as part of a bankruptcy process in 2009 a surprising pass.
Could the fact that Hostess’s private-equity partner,  Ripplewood Holdings, is owned by one Timothy C. Collins, a major Democrat donor and pro-labor advocate, explain the media’s curious reticence to pounce on Wall Street?
Imagine the media outrage if Bain Capital had acquired Hostess, had hired a former congressman and presidential candidate to lobby for it and had placed his son in a lucrative board position, and had collected management fees until Hostess no longer had money to pay. Imagine a liquidation in which Hostess brands are acquired by a Mexican company that sells made-in-Mexico Twinkies to sugar-addicted American consumers.
We must turn to the ever-predictable New York Times’  account to explain the silence on Timothy C. Collins’ Ripplewood Holdings. Per the Times,  Bain is a “bad” and Ripplewood Holdings is a “good” private equity firm. Timothy C. Collins is a benevolent  private-equity tycoon, who donates big bucks to the Democrats. He wants to help the little guy. His Ripplewood Holdings is a mother hen. Bain Capital is a vulture.
For those, like me, who are confused, the Times goes on to explain that Ripplewood Holdings wasn’t “part of a get-rich-quick scheme.”  In fact, the benevolent Timothy C. Collins decided to “to make investments in troubled companies with union workers….  convinced that (he) could work with their labor organizations.”  (Good luck on that one!) The troubled Hostess, with its rocky relations with its Teamsters and bakery workers union, was to be a model for such deals. According to the Times, pro-labor private equity companies that contribute to the Democrat cause and do not aim for a quick buck are absolved of capitalist guilt.
After acquiring Hostess Brands, Ripplewood hired former house minority leader and presidential candidate, Richard Gephardt – a longtime friend of labor – to work out a deal with organized labor to lower labor costs. As a token of good will, Gephardt’s son was appointed to the Hostess board at an annual compensation of $100,000. Timothy C. Collins clearly had his political bases covered. His money, however, meant little to labor leaders.
The concessions that Gephardt and Ripplewood extracted from the Teamsters and bakery workers union proved insufficient to correct (to quote the Times) Hostess’s “out of whack” labor costs. With $860 million in debt and a $1.2 billion net loss, Hostess filed for bankruptcy in January insisting that it could not continue to operate without further cuts in union wage, health and pension cuts.
The bakery workers union, enraged by pay raises for management, struck on November 9. Court-ordered mediation failed, and Hostess announced it would wind down operations. As a final straw, Hostess determined it could not service its $860 million in outstanding loans and keep contributing to the unions’ pension plans.  Better an end to misery than misery without end.
At least Ripplewood Holdings had the good form to lose its shirt along with Hostess. The Times assures us that Ripplewood did not, like the Bain “horror stories,” pay themselves huge dividends and leverage the company even further. (We should ask who would lend Hostess more money under these circumstances.) I guess losing money is a virtue, and so much for Timothy C. Collins’  business model  of helping troubled unionized companies.
But the Times cannot resist class envy rhetoric. It echoes union complaints that Hostess Brands “increased management’s compensation at the same time it was seeking to cut employee compensation.” The new CEO  was paid $2.5 million and another  executive received a $400,000 pay increase.  (I guess unions cannot understand that top executives can jump a sinking ship pretty fast, ensuring that it actually sinks).  But for the Bakery workers union that was too much: “Our members …. are not willing to take draconian wage and benefit cuts …. and give up their pensions so that the Wall Street vulture capitalists in control of this company can walk away with millions of dollars.”
Even as liquidation proceeds, the Hostess unions hold out hope for Hostess’s 18,500 workers. “When the various Hostess brands are auctioned off, surely the new owners will hire you as part of the package.” Small chance when higher union costs and work rules were the problem in the first place.
Although the liberal press gives Ripplewood Holdings a pass on account of its union friendliness  and Democrat party donations, labor leader Trumka is in a less generous mood. Wall Street, not inflated union wages and Teamsters work rules, “destroyed  an American icon and the working lives of some 18,500 families.” Take that Timothy Collins and remember:  If you make your bed with vipers, you are likely to be bitten.
A question for Trumka: Why did you not ask the White House to create a “bakery czar” to dictate a bailout that injects billions of  dollars from the Treasury into Hostess Brands in return for 51 percent government ownership. Hostess’s creditors and Ripplewood Holdings could be ordered to the back of the line, and the Teamsters and bakery union and their pension funds could be given the remaining shares along with their existing contracts. Everything could have worked out just fine. Obama will have saved 18,500 jobs, Twinkies, and Ding Dongs.
Maybe Trumka could have made the sale. After all, where would the President be without the AFL-CIO? Oh, but I forget: Obama has run his last race for elective office, and how could any President sanction such an obvious political bailout of a private company?
Paul Gregory’s new book The Global Economy and its Economic Systems will be published shortly by Cengage.

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