The end of Hostess

November 16, 2012: 10:35 AM ET

Snack time is over for the maker of the iconic Twinkie and other lunchbox staples.

By David A. Kaplan, contributor

FORTUNE -- The fat lady -- the one who apparently ate too many 150-calorie, nutrition-free Twinkies -- has sung.

But hey, we pretty much warned you in July to start hoarding Twinkies.  That's what it seemed like, as Hostess Brands -- the owner of such lunchbox snacks as Ding Dongs and Ho Hos, as well as Wonder Bread and the iconic "Golden Sponge Cake with Creamy Filling" -- struggled to emerge from its second bankruptcy in a decade.  Now it has happened:  Hostess announced early this morning that it would "promptly" liquidate the company immediately and lay off its nearly 19,000 workers.

The trigger was a strike this month by members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.  "We deeply regret the necessity of today's decision," Hostess said in a statement, "but we don't have the financial resources to weather an extended nationwide strike."  Instead, CEO Greg Rayburn said the company -- which has about $2 billion in annual revenue and nearly $1 billion in debt -- would move forward in bankruptcy court to start "selling its assets to the highest bidders."  Rayburn acknowledged "there's no way to soften the fact that this will hurt every Hostess Brands employee," but "unfortunately, because we are in bankruptcy, there are severe limits on the assistance the company can offer you."

MORE: Ding Dong vs the Ho Ho: Hostess labor fight continues

In an interview with Fortune, Rayburn said the strike had already cost Hostess "tens of millions" of dollars, and that no lender would offer up any more financing. Therefore, he said, anybody with the idea that there's a deal to be done was mistaken. Exasperated, Rayburn nonetheless said he had no regrets about strategy. "I did everything I could," he says. "I wouldn't have done anything differently -- except I would have come in sooner!"

Rayburn was hired as a restructuring expert only after Hostess filed for bankruptcy -- and became CEO nine days later, after Brian Driscoll quit suddenly and without explanation. Rayburn compared his Hostess experience to the current impasse between President Obama and House Republicans on "fiscal cliff" negotiations.

The strike by the bakers union came after months of brinksmanship on the part of both workers and the company itself.  When Hostess filed for Chapter 11 in January, it asked a bankruptcy judge to throw out fabulous legacy pensions that the bakers union and the Teamsters had.  As it turned out, the Teamsters fought that request, while the bakers union curiously chose not to contest it.  The Teamsters postured, saying they might strike if the court let Hostess off the pension hook (which often happens in these kinds of cases).  If a strike happened, Hostess said it would liquidate.  So both sides played a game of chicken.  (Chicken Twinkies??  Never mind.)

Late in the summer, the Teamsters and Hostess reached a restructuring deal that included an immediate 8% wage cut, adoption of work rules more favorable to the company, decreased employer contributions for health insurance, and drastic reductions in Hostess contributions to multiemployer pension plans.  The plan was endorsed by Hostess's key secured lenders, which are led by two major hedge funds in the New York City area, Silver Point Capital and Monarch Alternative Capital. One estimate put costs savings for Hostess in the neighborhood of $200 million.  For their part, the unions would receive two seats on a restructured nine-member board of directors and 25% of equity. That made the unions part of Hostess capital structure for the first time.  The federal bankruptcy court approved the deal.

But the bakers union unexpectedly balked as Hostess began to implement the restructuring, which eventually culminated in the strike -- and Hostess's decision to call it quits. Are there lessons in this sad corporate tale?

MORE: Hostess is bankrupt … again

Several come to mind:

Bluffing has its risks.  It may well be that the bakers union decided that its soon-to-be-unemployed workers will be better off in the long run in other jobs that that are more secure and better paying than the ones Hostess was offering. Rayburn speculates as much, suggesting to Fortune that the leadership of the bakers union "would rather forfeit these [Hostess] jobs than face demands for future concessions" from other companies. But it also may be that the bakers union miscalculated and didn't believe Hostess would liquidate.  After all, Hostess had seemingly backed down from that threat at different points this summer.

Bluffing has its risks, part 2.  Hostess may have invited the bakers union to strike.  See above.

Keep emotion out of it.  Some have speculated that the bakers union acted out of pique rather than economic self-interest.  That wouldn't be smart.

Darwin may not be right.  Hostess has nobody to blame but itself for a decade of questionable management calls and labor deals.  In that sense, killing the company -- and hoping a new owner of some of the brands can reinvigorate them—makes economic sense.  But thousands of unemployed workers in a lousy economy will tell you otherwise.

Beware puns.  Whether it's been Hostess getting creamed or the unions taking half a loaf or the employees fighting over the crumbs or the Devil Dogs being in the negotiating details, we here at Fortune have resisted few opportunities at word play.  We were weak.  We should have been stronger.  We apologize.  But this rich saga has taken the cake.

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