Tuesday, November 20, 2012
OK, so now that it looks like Hostess has another shot at life - the judge has ordered mediation and private equity buyers like, Sun Capital, are starting to gather, it's worth getting some detailed background on Hostess. For that there's a very good article in Fortune from this summer. This backgrounder reviews the sorry history of Hostess Brands from the 1920s to its bankruptcy in the 2000s to its currenting teetering on the verge holding a $1 billion in debt. OK, it's been a bit of a mess.
Central to its current struggles is the question of the mult-employer pension plan ("MEPP") that is in place for Hostess. Hostess wants rid of it. From the Fortune article:
MEPPs, which grew in popularity back in the union glory days of the 1950s and '60s, were designed for companies within an industry to share pension burdens. There are nearly 1,500 MEPPs in the country, covering more than 10 million workers. These mammoth defined-benefit plans -- employers, not workers, make the contributions -- were especially attractive to unions, as they allowed workers to move easily between companies.
Trouble with MEPPs is, if some employers go out of business, the remaining companies have to pick up the shortfall in funding benefits. When there are too few employers left standing, the fund is in trouble. According to a March research report by Credit Suisse, MEPPs are now underfunded by $369 billion. A third of the 40 MEPPs to which Hostess contributes are among the most underfunded plans in the country.
At the bargaining table, week after week, Hostess and the Teamsters have gone at it over the MEPPs, which Hostess contends are at the heart of its woes. Perella Weinberg's Michael Kramer has squared up against Harry Wilson, the financial adviser retained by the Teamsters. Monarch's Herenstein has been there. So has a representative from Silver Point. Though all are cordial -- somebody once served Hostess snacks -- they've yet to achieve a middle ground.
Now, according to the Dealbook, investors are starting to get interested. If I were a Teamster that would start to get me nervous. Why? Well, one of the potential investors - Sun Capital - looks familiar and Sun is holding a fresh opinion from a Federal district court in Massachusetts that is basically a road-map for shedding unwanted MEPP obligations. The implications of Sun Capital Partners v. New England Teamsters and Trucking Inustry Pension Fund is that private equity funds are essentially immune from liability for withdrawing from a MEPP or for unfunded benefits under a single employer plan. Ugh. Want to sully PE's image further, then let them to do this. In any event, the court in Sun Capital reached this conclusion because it ruled Private Equity funds are not "engaged in a trade or business" and are merely passive investors (okaay...).
So, if the MEPP is in fact the issue keeping Hostess transaction from getting done and if Sun has just entered the room, I think the negotiating ground just shifted.