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Ding Dong The Twinkie's Dead

(This post was originally written at the time of Hostess' demise, but the lessons remain true, even today.)

Wonderbread is toast. Ding Dong the Twinkie’s dead. And who can have a Merry Christmas without Ho Ho’s? The Twinkie goes back to court on Monday. The United States Trustee has objected to the Hostess plan to sell the company assets, primarily because top management wants $1.75 million in bonuses to hang around and help sell everything. The government is crying foul and wants someone independent to sell the assets. The fight in bankruptcy court now is over who is going to get paid to sell off Hostess.

Everyone who jumped the gun and paid too much for a box of Twinkies on eBay will probably feel a little chagrined when Hostess brands show up on the shelves again. The Hostess brands, recipes and goodwill (a legal and accounting term for why a spongy yellow cake filled with cream called "Twinkie" will sell better than a spongy yellow cake called something else) -- all of these assets will be sold to someone who wants to make and sell Twinkies and the money will be used to satisfy the debts of the old company.

The demise and ultimate resurrection of the Twinkie is probably a good time to examine how bankruptcy operates in our country. The bankruptcy law is designed to balance out competing financial interests when there isn’t enough of the money pastry to go around. The law designates the portions of debt that will be paid.

I logged on to the Court Docket for the United States Bankruptcy Court of the Southern District of New York and spent some time trying to decipher who was actually owed money by Hostess. As of Thanksgiving, 1789 documents have been filed in the case -- that happens when you owe people over a billion dollars.

Three creditors hold the bulk of the debt: General Electric Capital Corporation, Silver Point Finance, LLC. and The Bank of New York Mellon Trust Company. Together these three companies are owed over $861 million dollars. These three creditors are secured creditors, meaning they have liens on Hostess’s property. When the trademark and recipes are sold, these three will get most, if not all of the money.

Besides the secured creditors, Hostess owes about $50 million to various state and federal taxing authorities. The tax claims will be second in line for the money. Over $260 million is owed to other unsecured creditors who will likely see little or nothing from the sale of the company assets. This doesn’t count all of the leases and contracts that will be wiped out by the company’s liquidation. Shareholders in the company will receive nothing as well.

Now this is a simplistic breakdown of what happens when a company is liquidated, but it is essentially the order required by the bankruptcy law. The entire purpose of Chapter 11, which is the type of bankruptcy Hostess filed last January was to take the billion-plus debt load and restructure it in a way that Twinkie the Kid and his cohorts could ride in and save the day through sales. The theory behind the law is that operating businesses are worth more than the sum of their parts. In this case, the debt load was just too much to allow for the continued operation of the business.

Someone will buy the rights to make and sell our favorite cream injected cupcake for a lot less than a billion dollars. Twinkies have lots of preservatives, but none that can take out a billion dollars in debt -- that is left to our bankruptcy laws.


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