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Can Wonder Bread Rise Again?


Dressed in a rumpled shirt and working on three hours of sleep, Antonio C. "Tony" Alvarez II is in overdrive. On Sept. 22, he was appointed CEO of bankrupt Interstate Bakeries Corp. (IBC), famous for such iconic brands as Wonder bread and Twinkies. Since then, Alvarez, 56 -- who is co-chief executive of one of the country's biggest turnaround firms, Alvarez & Marsal LLC -- has been at Interstate's Kansas City (Mo.) headquarters, parsing financial statements and pep-talking workers in a bid to save the company.

Back in A&M's Manhattan headquarters, his partner, Bryan P. Marsal, is resting. He's fresh off a stint as chief restructuring officer at HealthSouth Corp. (HLSH.PK), the embattled Birmingham (Ala.)-based rehabilitation hospital chain that nearly sank into Chapter 11 last year after former CEO Richard M. Scrushy allegedly inflated earnings by $2.7 billion. (Scrushy is contesting the charges.) Marsal, 53, spent 15 months rebuilding HealthSouth. He slashed 250 jobs. Then he sold assets such as Doctors Hospital in Coral Gables, Fla. -- not to mention 10 planes and one helicopter from Scrushy's fleet -- helping to pay down $3.3 billion in debt. As a result, HealthSouth is expected to generate $650 million in cash this year. Alvarez intends to work the same magic on Interstate as his partner did on HealthSouth. "We come to companies at their worst moments in life, and we save them," says Alvarez.

Cocky and intense, Alvarez and Marsal have become Corporate America's favorite repairmen. The tag team's 21-year-old firm has helped salvage dozens of sinking companies, from watchmaker Timex Corp. to drugstore chain Phar-Mor Inc. Their recipe, they say, is simple: Relentlessly cut costs, hoard cash, and constantly communicate the minutest of financial details and restructuring plans to creditors, so as to avoid any backlash. Most important, they make quick and decisive decisions to resolve problems that company executives might waffle over for months -- a brash approach that has sometimes gotten them into trouble.

UNAPPETIZING RECIPE

Interstate could be one of A&M's biggest challenges. The nation's largest wholesale bakery refused to cut its overhead and therefore was unable to offer bargain-basement prices that would have allowed it to push more aggressively into mass-market channels such as Wal-Mart Stores Inc. (WMT). It also botched a plan to reformulate its Hostess cupcakes and Ding Dongs so that they would have a longer shelf life. They turned out doughy and unappetizing. By his first day on the job, Alvarez had helped persuade J.P. Morgan Chase & Co. (JPM) to pony up $200 million in new financing to keep Interstate's ovens running. Interstate filed for bankruptcy protection the same day, weighed down in part by $600 million in debt. Now Alvarez is planning to slash labor and production costs, while boosting distribution to Wal-Mart and other discount retailers.

The markets are confident so far: $100 million of Interstate bonds issued in August are still worth 85 cents on the dollar -- solid, for a distressed company. "We like the approach he is taking," says Leo Benatar, a former chairman of the Federal Reserve Bank of Atlanta and Interstate director. "It isn't just total liquidation."

While Alvarez and Marsal have won plaudits from corporate boards, they also have stirred up controversy. Competitors, especially, allege that A&M is prone to self-dealing, pointing to examples such as a deal with Enron Corp.'s accounting firm, Arthur Andersen. While Marsal was dismantling Andersen, A&M hired six of its former turnaround specialists. Although the new hires weren't involved in the Enron scandal, critics slammed A&M for helping itself to the assets of a bankrupt client, putting A&M's interests ahead of those of creditors and shareholders. Marsal contends that A&M bought out the employees' contracts with the blessing of Andersen's board.

PLAYING TOUGH

It wasn't the first time the partners were accused of being greedy. In 1996, Marsal crafted a plan for Vestar Capital Partners, a New York investment firm, to buy bankrupt apparel maker Bidermann Industries USA Inc. without a public auction. Under the deal, Marsal, already Bidermann's CEO, would have kept the top job for three years, and A&M would have received an equity stake. The court disapproved. "Mr. Marsal has abandoned the debtors' interest in order to advance his own personal wealth," wrote Tina L. Bozman, chief judge of the U.S. Bankruptcy Court in the Southern District of New York. The slap led Alvarez and Marsal to institute a rule barring the firm from investing in client companies or funds that might seek to buy those companies.

Still, A&M can play tough with clients and their creditors. Marsal and HealthSouth execs sued Michael J. Embler, a distressed debt investor with Franklin Mutual Advisers LLC, for declaring HealthSouth in default and demanding accelerated bond payments. The case ultimately was settled out of court. "Some people call me a bull," Marsal says. "I just go straight ahead." Embler did not respond to requests for comment.

Alvarez and Marsal honed their take-no-prisoners approach while working as in-house Mr. Fix-Its. Alvarez once ran the restructuring practice at accounting firm Coopers & Lybrand, while Marsal worked in Citibank's (C) bad-loan unit. They met as finance executives at former consumer-goods conglomerate Norton Simon Inc. in the early 1980s. During a round of golf, they decided they should offer an alternative to the legions of consultants who got bogged down in details and were afraid to radically change the companies they were trying to save. "It's better to make a decision, be 10% wrong and 90% right, than not to address the problem," Marsal says. Soon after, they founded their firm based on that philosophy. A&M now has more than 300 employees, each of whom generates $500,000 to $700,000 in annual revenue, Marsal says. The total payoff can be huge for the firm: HealthSouth has paid A&M $24 million so far. A&M often also receives "success fees," generally calculated based on the rise in a company's value over a set period of time.

Alvarez and Marsal have riches and notoriety to spare, but family is their biggest passion. Alvarez, who was born in the Philippines, was married at 17. He and his wife, Abigail, immigrated to the U.S. in 1969 and settled in New York. Today, three of Alvarez' sons work at A&M. "We're very, very tight-knit, sort of clannish," says Antonio M. Alvarez III, 38, who runs A&M's European business. Marsal, a six-foot-four former high school football player who was raised in Detroit, is often on the road like his partner but is determined to return home on weekends to attend PTA meetings and his two children's soccer games.

The duo continues to score juicy projects. And they have designs on ailing industries, such as airlines. It's not yet clear if A&M will score another win at Interstate. But if it does, Alvarez says he knows how he'll celebrate with Marsal and their comrades: with a big batch of Twinkies.

By Brian Grow in Atlanta


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