Hostess Floats $200 Million in Cost Cuts to Exit Bankruptcy

It's the final attempt to save the Twinkies.


In a heavily negotiated deal months in the making, Hostess Brands this week extended its final offer to unions representing nearly half the company's employees in order to save the company and force it out of bankruptcy. The proposed deal would save Hostess nearly $200 million in costs, according to a person familiar with the matter, with some $60 million in transaction fees being forfeited by advisers involved in the deal in order to improve liquidity.

Among the plans are steep cuts to wages as well as cuts to healthcare, welfare and pension plans for the company's 19,000 employees, according to internal documents reviewed by CNBC.

According to the plan, wage cuts of 8 percent (saving roughly $40 million) would be implemented across the entire company, including management, according to a person familiar with the matter. Company contributions to health plans would be slashed by 17 percent. The biggest cuts would come to the company's multi-employer pension plans, where Hostess will slash $75 million by ceasing contribution until January 2015. At that time, the company will contribute a quarter of the amount it did previously, the documents show.

"Some of the concessions are deep," Hostess chairman and CEO Greg Rayburn wrote in a letter to employees, while stating that lower operating costs for the company would be "critical."

In addition, Hostess has proposed to sell its Merita bread brand, and internal documents say the business has attracted "substantial interest" from bidders already. Merita employs around 675 people, and further asset sales and/or layoffs could come at a later date, according to people familiar with the matter.

In January, Hostess filed for Chapter 11 protection for the second time in a decade as it cratered under a debt load of roughly $900 million. In the meantime, its operations have been further hampered by the summer drought, which has driven up prices for commodities like grains that are the foundation of Hostess products, like Twinkies, Ho Hos and Ding Dongs.

The proposed deal represents an inflection point in the company's discussions with the International Brotherhood of Teamsters — a union that backs roughly 7,500 Hostess workers. IBT members will vote on the proposal in September, and the group will also get to appoint one director to the Hostess board. To be implemented, Hostess must secure approval from the Bakery, Confectionary, Tobacco Workers and Frain Millers International Unions in October, as well as several smaller entities.