There is Life After Bankruptcy for Some Companies
Feb 23, 2009
Wall Street Journal
February 23, 2009
By Jeffrey McCracken and Peter Lattman
It was a near-death experience for the Twinkie.
Against the odds, Interstate Bakeries Corp., which makes Twinkies, Ho Ho's and Wonder Bread, emerged this month from bankruptcy-court protection in the worst financing environment in 75 years. It joins chemicals maker Wellman Inc. as a rare recent survivor of the Chapter 11 bankruptcy process.
A year ago, investors were willing to pile into virtually any restructuring. Today, they're far more picky, leaving the likes of Circuit City Stores Inc. and ethanol giant VeraSun Energy Corp. to liquidate.
Interstate Bakeries emerged from bankruptcy protection as a smaller, leaner company -- which still makes Twinkies, above, in Schiller Park, Ill.
The lesson of Interstate and Wellman is that there is funding for companies that have fanatically focused their operations and taken out costs. And that's a hopeful sign for scores of other companies trying to avoid liquidation.
"I think in this era you need to shrink down to just your very best businesses," said Jonathan Henes, a Kirkland & Ellis attorney who oversaw the Wellman case. "You need to just focus on your core strength and make the painful, hard decisions."
The new companies are far leaner than when they first sought court protection from creditors. For instance, Wellman, a South-Carolina based maker of products used in plastic soda bottles, has let go of 80% of its employees, shed 80% of its debt and reduced revenues by nearly 60%.
Interstate fell into bankruptcy back in 2004, after consumers rejected its bread and pastries amid the low-carb diet fad. It emerged from court protection in February with nearly $600 million of new equity and debt financing, no small feat in this environment. Private-equity firm Ripplewood Holdings gained control of Interstate, investing $130 million in a combination of equity and convertible debt for a 50% stake. It also received warrants to buy an additional 15% of the company.
Interstate's existing secured creditors own the balance of the equity. Led by Silver Point Finance and Monarch Alternative Capital, the creditors committed to a new secured loan of roughly $350 million, for which they received equity and warrants in the company. General Electric Co.'s finance arm also extended a $105 million credit facility.
Chief Executive Craig Jung, a longtime food and beverage-industry executive hired in 2007, said at several junctions he thought Interstate wouldn't make it out of bankruptcy because of financial-market gyrations and fierce labor negotiations with unions.
The Kansas City, Mo., company employs 22,000 people across 41 bakeries, roughly a third of whom are in the Teamsters union. Interstate locked horns over a new labor deal, even enlisting former Missouri Democratic Sen. Richard Gephardt to broker an agreement.
As part of the deal, Interstate's 19,000 union employees took an equity stake in the company and a profit-sharing plan. In exchange, workers agreed to concessions including wage cuts and health-insurance increases, saving Interstate more than $50 million annually.
Wellman, which filed for bankruptcy in February 2008, looked
on several occasions like it might have to liquidate and fire all of
its 1,000 employees. It entered bankruptcy with sales of about $1.2
billion, debt of $575 million and earnings of $27.1 million -- meaning
it was levered at 20 times.
For several months it shopped around its entire three-plant
operation, each of which made specialty chemicals but with little
overlap and few of the same customers. But two different plans fell
apart due to fights with or among debt holders over valuations and
other issues. Each time, liquidation seemed likely.
In October, financial adviser Lazard Ltd. hatched a strategy to shut or sell two plants, equal to 60% of the company, and find a buyer for the rest, which made a resin used in the production of plastic bottles for companies like PepsiCo Inc. This plan was designed to focus on what Wellman did best -- and what it made the most money on.
The company sold its engineering-resin plant in Johnsonville, S.C., for about $6 million, saving about 250 jobs. It closed a second plant in Palmetto, S.C., which eliminated about 500 jobs, many of them former co-workers of new CEO Mark Ruday.
"That was one of my hardest days. I started there 20 years ago as a plant controller," said Mr. Ruday, 42 years old, who took over in May. "I knew a lot of the people, saw them shopping in the grocery store in town. But I did it because I thought it would save the rest of Wellman. Those plants were unprofitable and a drag on the rest of the company."
A leaner and more profitable Wellman emerged in early February after BlackRock Financial Management Inc. and Solus Alternative Asset Management invested $35 million in new capital in return for a second-lien convertible note that can be exchanged for a 50% stake. The structure of the investment protects the two hedge funds; if Wellman ever gets back into Chapter 11, they should either be paid back first or their debt would make them its owner.
Wellman now has annual sales around $500 million and about 200 employees. It projects annual earnings of $40 million to $50 million with $125 million of debt.