FORTUNE — Twinkies might now be better shaped like pretzels. That’s because of all the corporate twists their owner, Hostess Brands, has been going through in its current bankruptcy. In the last few days, the twists have been head-spinning. And the fate of the company has never been more in doubt.
Hostess, which also owns Ding Dongs, Ho Hos, Wonder Bread and other celebrated baked goods, has been in Chapter 11 since January, its second such filing in a decade. The key parties have been two major hedge funds and two big unions, and they’ve been fighting over wages and pensions. Hostess contends givebacks are needed for the company to emerge from bankruptcy. The unions respond they’ve given up enough. Last month, Hostess made what it said was its “last, best offer.” CEO Greg Rayburn told Fortune that union rejection would result in the company immediately filing to liquidate—and putting thousands of employees out of work. Union members were faced with a Hobson’s choice: accept drastic concession or lose their jobs.
Late last Friday the largest unions—the Teamsters—announced that by a narrow vote, 53.6% to 46.4%, its Hostess rank-and-file had approved the new collective bargaining agreement. (Out of 7,900 Teamsters voting at the company, slightly more than half cast votes). Rayburn and Teamsters leadership both offered up measured words about the “difficult” decision.
But shortly thereafter, word came that the 7,000 employees of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union had rejected Hostess’ proposal. (No details of the vote were announced, though some press reports suggested there were only voice votes at locals rather than a written mail tally.) Though the leader of the bakers’ union in recent weeks had excoriated the proposal, the rejection was nonetheless curious. That’s because the bakers’ union had been quiescent for months in bankruptcy court, letting the Teamsters engage Hostess management and the hedge funds over the company’s demands to restructure by scuttling existing labor agreements.
The dispute got even messier when Rayburn didn’t follow through on his promise to liquidate the company after the bakers’ union rejection. Instead, as he explained to Fortune late Friday, Hostess would return to court this week in suburban New York City and renew its request under bankruptcy law that the unions be forced to accept the new collective bargaining agreement. Had Rayburn blinked? He said no. “I’m hesitant to shut the company down under these circumstances,” Rayburn told Fortune. “Obviously the bakers were misled.” Rayburn says those workers were led to believe both that Hostess would make a secret better offer and that there was a “white knight” ready to swoop in to buy the company. Rayburn says neither is true.
The proposed new labor deal consists of an immediate 8% wage cut and work rules more favorable to the company. Employer contributions for health insurance would decrease 17%. Hostess contributions to multi-employer pension plans would cease until 2015, at which point the current required level of funding would plummet from $100 million to $25 million. According to Rayburn, the proposal has been endorsed by Hostess’s key secured lenders, which are led by hedge funds Silver Point Capital and Monarch Alternative Capital. One estimate put cost 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 would make the unions part of Hostess’ capital structure for the first time.
The deal would also restructure much of Hostess’ nearly $1 billion of debt. Silver Point Capital and Monarch’s current stake, each worth somewhere between $50 million and $100 million, would largely remain. But the $170 million that has been invested by private-equity firm Ripplewood Holdings—which acquired control of Hostess as it came out of its first bankruptcy in 2009—would be wiped out. In addition, various professionals involved in the bankruptcy proceedings—including lawyers and investment bankers—would give up $60 million in fees, about an 18% discount.
A court ruling could come as soon as early October. Most bankruptcy judges in these kind of cases allow companies to impose new labor deals. If Judge Robert Drain does and the bakers’ union exercises its right to then call a strike, Rayburn says, he’ll immediately liquidate Hostess—and that will be the end of the company. The question is whether the baker’s union believes him—and whether it cares. It may be that union leadership prefers to have a new deal judicially imposed on it rather than volunteering to accept what it regards as fundamentally unjust. Or it may be that union leadership believes its members are best served by ultimately finding other jobs. Since leadership has offered no comment since the vote, there’s no way to know. Evaluating those unknowns is now the dynamic facing a judge and a company.