The fate of Twinkies just got more complicated E-mail Tweet Facebook Google Plus Linkedin Share icons by David A. Kaplan @FortuneMagazine August 27, 2012, 10:26 AM EDT Twinkies-maker Hostess Brands has offered a potentially sweet deal to the unions it’s been fighting with: 25% of equity and two seats on a restructured nine-member board of directors. That would make the unions part of Hostess’ capital structure for the first time. Since January, Hostess, which owns Twinkies — along with Ding Dongs, Ho Hos, Wonder Bread and other iconic baked goods — has been in bankruptcy. The chief combatants have been two major hedge funds and the Teamsters. Last month, they were inching closer to an agreement over costly employee pensions that would give Hostess a chance to emerge from its second Chapter 11 filing in a decade. But even though they made further progress in recent weeks, Teamsters leaders ultimately declined to accept the final management proposal. Nonetheless, they agreed to pass the proposal along to the rank-and-file. Those 7,900 employees, along with roughly 7,000 workers who belong to the less-combative Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, will be voting in September and October whether to accept cuts in wages, pensions and other benefits, along with work rules more favorable to the company. It’s unusual for union leadership to send a proposal to workers despite not approving it. Hostess CEO Greg Rayburn told Fortune what the stakes were. If the company proposal is rejected, he says, the company will “move toward liquidation.” He told all Hostess employees the same thing in a letter asserting a “breakthrough” and promising a “brighter, more secure future.” Rayburn is hoping employees believe his threat and accept “deep” concessions rather than vote to be out of work altogether. But, unpublicized in the media, the Hostess offer also includes 25% of the equity and a minority position on the board. While Hostess’ financial track record of the past decade is dismal — its debt is crushing and equity has effectively been wiped out in bankruptcy — gaining a significant piece of ownership in the company could still prove appealing. MORE: Hostess is bankrupt … again The unions declined comment for this story. But in a message to Hostess employees who were Teamsters, Ken Hall, the union’s secretary-treasurer and No. 2 man, wrote that “[we] cannot endorse the company’s final offer. But given that the likely consequence of rejecting it outright means the loss of your jobs, it is our duty to inform you…what the offer means to you and your livelihoods and to let you vote on your future and the future of Hostess.” Under the Hostess proposal, the details of which were provided to Fortune on an anonymous basis, Hostess employees, including management, would have wages immediately cut 8% but then raised 3% in the next year of a five-year contract. Employer contributions for health insurance would decrease 17%. 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 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 $190 million. The deal would restructure much of Hostess’ nearly $1 billion of debt. Silver Point Capital and Monarch’s current stake, each somewhere between $50 million and $100 million, would largely be unchanged. But it was clear that the $170 million invested by Manhattan 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, under the deal, various professionals involved in the bankruptcy proceedings, including lawyers and investment bankers, would give up $60 million in fees, about an 18% discount. MORE: Private equity tax questions for Mitt Romney Rayburn says he will hold a series of “town hall” meetings with union members in September. “In my experience,” he says, “even though emotions can run high, people will respect a leader who will stand up, and take Q-and-A and be accountable.” He has set December as an “aggressive target” to emerge from the bankruptcy. If the deal is signed, Rayburn says a search for a permanent CEO would begin. The litigants in the bankruptcy are scheduled to give an update this week to the federal judge in the case. It’s possible Hostess is still playing a game of chicken. If, say, the unions vote down the company’s proposal, especially by a narrow margin, employees may assume Hostess will come back with another, improved offer. But Rayburn wants to shoot down any such pie-in-the-sky expectations. Two years ago, he was brought in as the restructuring expert to run New York City Off-Track Betting when it went bankrupt. “I have a track record. When I told the New York Senate that if they didn’t approve [a rescue bill] the way the Assembly did I’d close OTB. And they didn’t and I did.” In other words, Rayburn may be the wrong negotiator to bet against.