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Whether or Not the Twinkie Goes Away, the Hostess Situation Takes a Bite Out of Big Labor

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The fact that Hostess and thousands of unionized workers may go down together on the same ship is a fitting end to a bygone era.

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MINYANVILLE ORIGINAL Three cheers for nostalgia. Without a healthy dose of it, baby boomers wouldn't have spent the weekend frantically clearing their local supermarket shelves of what could very well be the final batches of US-made, original recipe, pre-crisis Twinkies and Wonder Bread.

Also credit nostalgia for the mistaken belief that Big Labor wasn't behind the demise of Hostess, a once-loved American brand. Like Alexander the Great, who wept because he believed there were no empires left to conquer, union bosses are hitting the airwaves to complain that thousands of their members could soon be out of work. Meanwhile, the bankruptcy judge has ordered the bakery union and management into mediation.

What the unions fail to mention is that the recent strike by the Bakery, Confectionery, Tobacco Workers and Grain Millers Union felled Hostess – and thousands of jobs along with it. A second union, the Teamsters, had already agreed to wage cuts and made other concessions the company's management had requested.

It might be easy to get nostalgic about mid-20th century American institutions. Hostess combined advances in food preservatives and packaging with mass production and distribution to create cakes that were hygienically sealed and could last for weeks on the shelves of supermarkets.

Labor unions were borne of the same era, and in some ways, the same bigger-is-better mentality: Organizing workers would give them a stronger voice in negotiating salaries and benefits with management. That one union could drag down Hostess despite the concessions of thousands of members of a second union is a fitting end to a bygone era.

Consider the economies of scale that a Hostess Brands executive could achieve because of the nature of his or her business model. The cost per unit to bake and distribute cakes, as well as the general operational costs, would decrease the bigger the Twinkies empire became. But that model gets out of whack when the cost of labor becomes so prohibitive that smaller and more nimble companies, many of which operate overseas with little or no labor troubles, could beat a company like Hostess at its own game.

The baking union boss, Frank Hurt, said at a press conference yesterday that he was confident someone would rescue Hostess Brands and put his legions back to work, where, presumably, they can begin chipping away at their new owner's profit margins. The exasperated chief executive officer of Hostess, Gregory Rayburn, countered Hurt's remarks by warning potential suitors of falling victim to nostalgia. "Nobody wants to have anything to do with ... these unions or these contracts," he said.

In Canada, production of Hostess products will continue without disruption. Saputo (TSE:SAP) owns the Canadian rights to the Hostess products and it is not impacted by the US liquidation.

One idea is that a private equity firm might come to the rescue and reorganize Hostess. The problem is that private equity firms have grown all too wary of dealing with Big Labor; it's much easier for them to unlock value elsewhere.

Remember when Cerberus Capital bought the bulk of Chrysler from its German owners some five years ago? The PE guys strode into the deal assuming they'd be able to negotiate pension and health care concessions with the United Auto Workers Union. Little did they realize that the American auto industry had become one, giant health care provider that happened to build cars on the side.

That's not to say some private equity shops won't express interest in purchasing portions of the Hostess franchise. One of the principals of the Greenwich, Conn.-based private equity firm Metropolous & Co., said last week that he was considering bidding on some of the company's assets. "Shedding the complications of the unions ... makes [Hostess] even more attractive," he said.
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