Hostess lives another day (but only one)

November 20, 2012, 3:51 PM UTC

FORTUNE — The Twinkie avoided the electric chair Monday afternoon. (Regrettably, we will demur on any temptation to make jokes about Fried Twinkies.) But the reprieve may not last long.

Surprising all parties, as well as a public that seemed to be coming to grips with the end of Hostess Brands, a federal bankruptcy judge put off the company’s motion to liquidate its assets. Instead, Judge Robert Drain pushed Hostess, lenders, and the bakers union that’s at the heart of the current dispute to agree to court-supervised mediation Tuesday. If the parties can’t come to a quick last-ditch deal, Hostess is scheduled to return to court Wednesday and ask Judge Drain again to approve its liquidation plans, which will include auctioning off Hostess’ best-loved brands like Twinkies and Wonder Bread.

After a long death spiral brought on by high debt, anachronistic pensions, outdated plants and a deeply distrustful workforce, Hostess’ demise had seemed assured. (The company has been in bankruptcy since January — its second in a decade.) After an acrimonious summer of negotiations, Hostess warned it would cease operations if both major unions — the Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union — did not assent to its last, best offer. The Teamsters yielded, and agreed to deep cuts in wages and pension benefits. One estimate put costs savings for Hostess in the neighborhood of $200 million. In return, the unions would receive two seats on a restructured nine-member board of directors and 25% of equity.

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But the bakers — which, unlike the Teamsters, chose never to fight Hostess’ request to Judge Drain to toss out its most recent collective bargaining agreements — turned militant. Their chief excoriated the company. And then came the strike, seemingly calling Hostess’ bluff. Citing millions in losses and the absence of further financing by hedge-fund lenders, Hostess CEO Greg Rayburn last Friday pulled the plug on the company.

The court, though, balked at approving a liquidation order. Judge Drain’s concern over the loss of potentially 19,000 jobs is understandable. Press reports have speculated there still could be a deal. But given Rayburn’s resolute assertion that Hostess was done, it’s hard to see what Judge Drain is hoping for.

Assume, say, the bakers union lays down its rhetorical arms and utterly capitulates, what might happen next? Would Hostess then abandon its position that the strike was the fiscal coup de grace — and instead agree to reorganize on the terms of its final offer? Would the controlling hedge funds — Silver Point Capital and Monarch Alternative Capital — ante up more dollars for a heretofore dysfunctional company? Judge Drain wouldn’t appear to have any leverage on either.

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So, if the answer to either question is no, what the Devil Dog is going on? Two possible theories:

The judge reads too much press.  Judge Drain is highly respected. He’s not likely concerned with P.R.  Even so, he’s probably not immune to all those saccharine nostalgic laments over the end of Creamy Filling and childhood innocence. “I tried everything!” he might be thinking. So, the argument would go, if the public believes the government did all it could to save Hostess — short of a “Too Delicious to Fail” bailout by Congress — the public will rest easier.

The bakers union is cooked. The judge yesterday expressed puzzlement that the bakers were quiescent all summer long, only to arise in anger at the end of negotiations. He then seemed to suggest the bakers may face serious liability down the road for an improper strike. To the extent the bakers now take that to heart and thereby relent, it may be that the lenders figure management will for a time have the upper hand in any disputes. If that’s right, the lenders might be more willing to lend just a little more right now.

Litigation is a funny business. The long, sad tale of Hostess has rife with contradictions and surprises. The company may yet live. But don’t count on it.