As noted in Steve Mufson’s excellent summary in today’s Washington Post (made all the more excellent by having quoted me!), the iconic Hostess Brands fell into bankruptcy yesterday.  As with every bankruptcy case, the best summary is found in the "first day affidavit" of the company’s leading executive, in this case Brian Driscoll, Hostess’ CEO and board member.  From it, we learn that Hostess was founded in 1927 and went on an acquisition spree over the next 60 years to amass 36 bakeries, 565 distribution centers, 5,500 delivery routes, and 570 bakery outlet stores in the US.  We also learn, not surprisingly, that it operates in a "mature industry with high levels of competition and related pricing pressures, thin operating margins, and competitors with more sophisticated technology and significant cost advantages."

As most people know, that mature industry with razor-thin margins also led Hostess to file bankruptcy in 2004 under the name Interstate Bakeries Corporation (IBC).  That bankruptcy languished for 4 years, with liquidation often considered a real possibility.  But the parties eventually worked through the differences in hard-fought negotiations and Hostess emerged in early 2009 with a new name and a new capital structure ("4 tiers of secured debt … of $860 million").  Unlike the government sponsored bankruptcies of Chrysler and GM that followed in short order, however, the bankruptcy effectuated no changes in Hostess’ legacy costs.  Mr. Driscoll’s first-day affidavit says Hostess won’t make that mistake this time around.

Why did Hostess’ plan fail?  Well, it was losing $150 million a year going into confirmation in 2008 and wasn’t projected to start generating real net income until fiscal year 2012.  Based on the financial projections, it seems the dream of the reorganization team (which lost a lot of money on this bet) was to turn the company around in five years, generate about $150 million in "EBITDA," and sell the reorganized company at some multiple of EBITDA to the next pipe dreamer at a number that would get debt and equity investors out whole, perhaps even with a modicum of profit. 

But, as Robert Burns waxed poetically in 1786–later popularized by John Steinbeck–"the best laid schemes of mice and men gang aft a-gley [often go awry]."  Instead of generating sales of $2.9 billion in FY 2011, it only generated $2.5 billion.  Instead of losing $34 million and $9 million in FY 2010 and 2011, respectively, it lost $138 and $341 million.  Highly leveraged, with interest costs of about $60 million a year, Hostess ended up collapsing like a badly baked cupcake.

Here’s the full plan and disclosure statement from Hostess’ 2008 reorganization for those wanting to read the gory details of its first extended trip into bankruptcy. 

Based on the restructuring plan outlined in Mr. Driscoll’s affidavit, Hostess’ second trip into bankruptcy won’t be as extended, but certainly will be contentious.

Thanks for reading!