Liquidating Hostess Assets Piece by Piece .... Nonunion Flowers Foods is Best Positioned ... That's Bad News for Former Hostess Union Workers

Hostess will now begin the process of selling its Twinkies and other brands, along with its physical assets such as factories. The entire liquidation process will probably last a year or so.

Although the process has barely begun, it looks like Georgia based Flowers Foods is an interested and financially capable buyer of many of those assets. In other words, Flowers should be better positioned to bid more for those Hostess assets it wants than other prospective buyers will be. That's because the assets desired by Flowers will be worth more to Flowers than they will be to other bidders.

Flowers Foods Sizes Up Hostess tells the story of the impending Hostess liquidation:

"Flowers Foods Inc., the maker of Tastykake and Nature's Own baked goods, could have a hankering for Twinkies and other products owned by Hostess Brands Inc.

The Thomasville, Ga., company is considered a likely bidder for some of the assets owned by Hostess, which last week was granted permission by a federal bankruptcy-court judge to begin liquidating. . . .

Flowers, the nation's second-largest baker by sales behind Grupo Bimbo, hasn't stated an intention to acquire Hostess assets but the company said last week that it had renegotiated lending terms that could allow it to tap additional cash, a signal that it could be gearing up to make a bid.

In bankruptcy court last week, an attorney for Hostess said the company had received a "flood of inquiries" from potential buyers.

"We therefore think there could be very healthy competition," said Heather Lennox, the company's outside lawyer at Jones Day. She added that Hostess may, within the next several weeks, start seeking court approval to take specific assets to the auction block. The company is looking for buyers for its approximately 30 brands, 36 plants and other assets.

Considered an efficient operator with a solid management team, Flowers started out as a bakery owned by the Flowers brothers in 1919, producing 30,000 loaves of bread a day. Over the years it has acquired numerous other makers of bread, rolls and snack cakes. But its presence is still largely concentrated in the Southern U.S. Based on that geographical concentration, Hostess is an attractive target, with its nationwide distribution of Twinkies, Ho Hos and Ding Dongs....

Flowers is unlikely to rehire Hostess employees as union workers, analysts said. It has been clear with investors that it isn't interested in assuming labor contracts . . . . More than 90% of Flowers's workforce is nonunion, analysts estimate.

Flowers plants have been running under capacity after a recent expansion for a private-label customer proved overly ambitious, the company has said. That extra capacity could make an acquisition of some Hostess snack cakes even more attractive, analysts say. "If Flowers were to buy some Hostess snack cakes, it would help them utilize their excess production capacity," said BMO's Mr. Sharma. . . .

Snack cakes are viewed as the more desirable part of the Hostess portfolio because Wonder Bread, the whitest of white breads, has suffered as Americans switch to whole grain breads, said KeyBanc analyst Akshay Jagdale. "Cake is a better category to be in and would fit into Flowers' current strategy," he said.

But BMO's Mr. Sharma said, "I wouldn't rule out the bread brands." He said some of Hostess's breads, such as Merita, might sell well in markets where Flowers doesn't have a bread brand. "I don't think they'd buy Wonder Bread nationally," Mr. Sharma said, "but they could piggyback on some Hostess brands to get into markets where they don't have retail penetration."

Flowers has acquired more than 100 companies since 1968, when it went public. Most of them have been small, closely held bakeries with nonunionized workforces, Mr. Jagdale said. That is in stark contrast to Hostess, which over the years bought large companies that had major union representation.

Analysts expect that if Flowers buys some Hostess brands, it would breathe new life into them the way it has with Tastykakes. Many Hostess products haven't changed in decades, and while it's unlikely anyone is going to make a health-food Twinkie, analysts say there is room to innovate....

Other companies have expressed interest in bidding for Hostess assets, including private-equity firm Sun Capital Partners Inc., liquidation firm Great American Group Inc. and C. Dean Metropoulos & Co., the owner of beer brands including Pabst Blue Ribbon, but analysts say there are plenty of assets to go around without a bidding war ensuing."

SUMMING UP

While we obviously don't know who will buy what Hostess assets as they're auctioned off through the bankruptcy court's supervised liquidation process, Flowers Foods as the biggest single buyer of Hostess assets, including its famous Twinkies brand, makes sense.

Flowers is in essentially the same business as Hostess, is now primarily only a southern regional player with excess production capacity, and wants to expand nationally.

Thus, if Flowers does make a bid for many of the Hostess assets, substantial value should be realizable, both by those liquidating and Flowers.

Of course, and not surprisingly, a Flowers purchase will leave out the unionized operations of Hostess. If that happens, the news for the vast majority of former Hostess employees won't be good.

In fact, a unionized work force will be seen as a "negative asset value" by Flowers and perhaps other buyers as well. This concept of negative value should get the attention of all of us, and not just the former unionized Hostess employees.

Employees who are members of a union still need an employer to employ and pay them. Only then can these company employees and union members pay the union membership dues. It's that simple.

In the highly competitive economic environment we're in today and will be in for a long time to come, there's simply no excuse for any group of employees not doing all they can to enable their companies to become world class competitors. It's a matter of jobs, economic prosperity and their nation's very economic health and stability.

So whether it's the former bakers union at Hostess, the UAW and its relationship to U.S. auto makers, our teachers unions at public schools or other similar situations, the various constituencies necessary to assure a productive, prosperous and financially stable and successful U.S. must come together.

Otherwise our future as the greatest nation on earth will be in serious jeopardy.

Thanks. Bob.