Hostess Brands is returning from its impending demise after bankruptcy proceeding, offering insight into the benefits of Chapter 11 business bankruptcy.
Hostess Brands, the American bakery icon, filed for Chapter 11 bankruptcy protection in July 2012 amidst severe labor issues and shifts in food culture. Many thought the company would shut its doors permanently; fans of Ho-Hos Twinkies bought boxes of the baked snacks in bulk as they prepared for the company’s demise. But Hostess Brands made a comeback, and worked to become a company worth $2.3 billion that is forecasted to increase its revenue and net profits over the next few years. So how did Hostess did it? In this blog post we take a look at the upsides of Chapter 11 bankruptcy and how it can help businesses struggling with debt.
In July, 2016, CBS News reported that Hostess Brands has a new owner: Gores Holdings, an acquisition company run by The Gores Group, a private equity firm. Gores Holdings is set to invest $375 million in cash in the company, and the Gores Group CEO, Hostess CEO, and other affiliates will invest an additional $350 million. Gores will change its name to Hostess Brands and trade under a new stock symbol later this year once the deal goes through. As for Hostess it self, this puts the company in much better shape than it was just a couple years ago – and it has Chapter 11 bankruptcy to thank for its endurance.
Now what is Chapter 11 bankruptcy? Chapter 11 is a form of reorganization mainly used by businesses. It also goes by the names “corporate bankruptcy” or “reorganization bankruptcy.” If a business is facing overwhelming debt, it may be able to file for protection under Chapter 11. Hostess Brands was facing a changing food customer and it was not keeping up with the times. This hurt it financially, so it used Chapter 11 bankruptcy as a way to works towards becoming profitable again.
Once it starts the Chapter 11 process, the business can operate as a “debtor in possession.” This means that they act as a trustee of the business and continue to be in control of its day-to-day operations. The debtor can then get on the path to profitability while undertaking financial restructuring and paying down debt. This can include negotiating loans from new lenders or canceling contracts that are detrimental to the business. Hostess Brands did this by cutting its staff from around 8,000 to 1,170. It also renegotiated its union contracts, and “slashed the number of bakeries from 11 to three, although it invested $130 million to improve its manufacturing capabilities,” according to the CBS article.
Hostess Brands was able to dramatically progress its financial position and find new ways of improving its brand presence. For example, it brought back its trademark Suzy-Qs treats, relseased new chocolate Twinkies, and dipped it toes in the in-store baked goods market in order to extend its business assets. Hostess used the benefits of Chapter 11 to look at ways of improving the company, not just letting it survive as-is. Companies that go through Chapter 11 need to look hard at every aspect of their business, get rid of harmful practices, and look long term at ways to take their company to profitably.