Bankruptcy: The Glorious New Beginning (Douglas French)
Thursday January 31st, 2013
You remember when Hostess declared bankruptcy last November? There were outcries that the iconic snack pastry would be gone forever. Speculators began to stockpile the tasty treats.
As Zero Hedge documented, eBay featured the following items:
Even now, there’s a rotting Twinkie for sale on eBay. Supposedly, Twinkies will remain edible for decades, even outliving their cellophane wrappers (or so goes the mythology).
- For a price of $89.95, three boxes of SEALED Box of Hostess Chocodiles 3x10 Chocolate Twinkies
- For a price of $99.99, four boxes of SEALED Box of Hostess Chocodiles 4x10 Chocolate Twinkies
- For a starting bid of $500, one Box of Twinkies; Unopened
- For a starting bid of $10, and a price of $595, a box of 10, opened and half-eaten
- For a starting bid of $5,000, a single Twinkie
- And finally, for a starting bid of $10,000 … a box of Twinkies (“one of the last boxes that will be available, its seller helpfully notes, before the Zombie Apocalypse”)
The belief was that unyielding union workers could make the Twinkie vanish. But that’s not how real capitalism works. However, we understand the confusion. In this bailout economy, whenever an enterprise is on the rocks, the workers cry out to their political friends that the employer must be saved or the jobs and products will be lost for good.
The government and media preached that not only would General Motors and Chrysler perish if the taxpayer didn’t step in, but all of the suppliers would be gone as well. Millions would lose their good, high-paying jobs. The Center for Automotive Research, a Michigan think tank, estimates that the bailout saved 1.5 million U.S. jobs by keeping GM and Chrysler, and the companies that depended on them, in business.
Uncle Sam shoveled $80 billion to the automakers, some of which has been paid back through a GM IPO. The taxpayers still own a slug of Government Motors and will be made whole only if or when the shares reach $51 (currently trading at $28). Chrysler still owes $1.3 billion.
And remember, this rescue happened in 2009. Time flies when you’re bailing out.
The automakers are now making a profit, but the U.S. Treasury’s latest figures estimate the Detroit bailout will ultimately cost taxpayers $25.1 billion. This number has been revised upward more than once, so don’t carve it in stone. Let’s just say at least $25.1 billion.
So $25 billion divided by 1.5 million jobs comes to nearly $16,700 per job.
Meanwhile, Hostess Brands couldn’t reach an agreement in November with the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union and began liquidation. According to the company’s website, “The wind down was necessitated by an inflated cost structure that put the company at a profound competitive disadvantage. The biggest component of the company’s costs was its collective bargaining agreements that covered 15,000 of 18,500 employees.”
The Obama administration must be more partial to cars than pastries. Administration officials were nowhere to be found as the company circled the drain. The shutdown of Hostess meant the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes, and 570 bakery outlet stores, as well as the loss of 18,500 jobs.
The company was founded in 1930 and built some iconic brands such as Hostess, Wonder Bread, Nature’s Pride, Dolly Madison, Butternut Breads, and Drake’s brands.
General Motors was founded in 1908 and owns iconic brands such as Chevrolet, Buick, Cadillac, and GMC.
Chrysler was founded in 1925 and owns brands such as Chrysler, Jeep, Dodge, Ram, Fiat, Mopar, and SRT.
Here we are less than three months after Hostess filed for liquidation and the bids are flooding in for the assets of the company. Its hoping to sell the brands, factories, and other assets for $1 billion.
Flowers Foods Inc. bid $390 million for the bread brands. United States Bakery Inc. agreed to pay $28.85 million for the Sweetheart, Eddy’s, Standish Farms and Grandma Emilie’s bread brands, four bakeries, 14 depots and some equipment. “We believe the assets and brands will allow us to provide fresh-baked Franz Bakery products to a wider and diverse geographical base,” Bob Albers, United States Bakery’s chief executive, said in a statement.
Two bids came in Monday for cakes and bread that brought the total offered to more than $440 million. These aren’t final bids, but are what’s known as “stalking horse” bids.
Stalking horse bidders are selected by the company to make the initial bid in a bankruptcy auction. This allows the distressed company to avoid low bids on its assets. Once the initial bid is put in place, competing bids can commence.
Hostess then selected C. Dean Metropoulos & Co. and their financial partner Apollo Global Management to provide the initial bid for its cake brands that include Twinkies, Ding Dongs and Ho Hos. As I write, Forbes is reporting that Metropoulos and Apollo will bid $400 million for the treats. This would set a tasty floor for the bidding, and if they were outbid, they would earn a breakup fee.
The point to all this is that the beloved Twinkie will be back on the shelves before you know it. Plus, many of the jobs required to make them will be reinstated. Yes, there may be fewer of them and they may be lower paying, but hungry consumers will be served.
Taxpayer cost per job saved: nothing!
Writing for Policymic.com a couple months ago, Lenny DeFranco wrote, “Let’s recognize that a company like Hostess is supposed to go out of business. Liquidation is a proper burial when you sell products no one wants and are unable to change.”
DeFranco said the whole idea that union wage demands and management incompetence took down the company was nonsense. “I think Twinkies lost their appeal when the possibility of having to survive a nuclear hellscape passed, or when people realized that subsisting on them in such a scenario would lead to a more agonizing death than leukemia,” he sniffed.
Well, Mr. DeFranco, the market is speaking, and the score looks to be Twinkie 840 million, DeFranco 0.
The same liquidation proceeding would have sorted out the brands, jobs, and assets of the automakers four years ago if Washington would have kept its nose out of it. No doubt some company would have bought Jeep, Cadillac, and the rest with production never missing a beat. Instead, taxpayers are $25 billion poorer, not to mention the odious CAFE standards Washington forced into the deal.
It turns out the Twinkie has an official shelf life of 25 days — not exactly immortal, but a long time for a baked good. But a fresh new supply is likely just months away.
Long live the Twinkie, thanks to bankruptcy
The lesson for economics, investors, and everyone is that bankruptcy can be a new beginning, a rebirth, the most bullish sign there is. It is not an end, but a light that shows the way to a wonderful future. Bankrupt but unsubsidized business can be a great place to place your bets on future growth. Now, if only all the bailed-out zombie institutions that are weighing on U.S. growth could be so lucky.
Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.