Interstate Bakeries should cut costs to bounce back, CRT analyst says

By Sheri Kasprzak

Atlanta, Oct. 6 - If Interstate Bakeries Corp. wants to make a comeback from its recent bankruptcy, it needs to get its operating costs under control, according to CRT Capital Group analyst Duncan Yin.

Interstate is suffering from high-priced union labor, outdated machinery and an excess of manufacturing plants, Yin, senior vice president and principal in CRT's research department, said in an interview. Those high-cost items put the company at a cost disadvantage, Yin believes.

"Until very recently it was a profitable company," Yin said. "This is not a typical bankruptcy where the firm has been having problems for years. But Interstate was significantly profitable through the end of calendar 2002 or mid-fiscal year 2003."

Interstate is still profitable on the EBITDA line, Yin said.

The company, Yin said, may still be in the black, but Interstate has not released financial statements since its March 2004 quarter.

Kansas City, Mo.-based Interstate Bakeries, which makes Twinkies and other baked goods, filed for bankruptcy on Sept. 22, just over a month after it sold a $100 million private placement of 10-year convertible senior subordinated notes.

According to a sell-side convertibles trader, a large fund owns a major chunk of the Interstate deal and may be trying to get back what is due through legal avenues. That information could not be confirmed Wednesday afternoon.

Traders have previously told Prospect News that investors would likely be able to make a fraudulent conveyance claim, a standard procedure when a company files for Chapter 11 within 90 days of a new issue. If successful, it would effectively unwind the convertible deal.

Interstate stock closed up $0.25 at $4.40 Wednesday.

Yin said he believes if Interstate just cuts its operating costs, the company's financing problems would likely fix themselves.

"It's a large company," Yin said. "It's the largest bakery in the nation. If it can get its costs a little bit under control, the financing will take care of itself."

As to whether the company will cut operating costs, representatives from Interstate say it is just too early to tell.

"He [Interstate Bakeries CEO Tony Alvarez] has said again and again that it's too early to say," said spokesman Jason Booth. "We're looking at all the possibilities and then we'll decide what action to take. There is a wide range of possibilities."

Booth said the company is looking for ways to streamline, but the route to take for that streamlining remains unclear.

Interstate's Chapter 11 case number is 04-45814.

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