The Long View

The seeds of Harry & David's dilemma were planted a long time ago, and the problems may not be over soon
Harry & David's Medford campus sits near hundreds of acres of pear orchards, a continuing symbol of the company's agricultural connections even as it deals with Chapter 11 bankruptcy proceedings.Bob Pennell

Harry & David's immediate future rests in the hands of a U.S. Bankruptcy Court judge in Delaware. The long-term outcome, however, may well end up back in the hands of the same people who were at the wheel when it entered Chapter 11.

The thought of New York private equity firm Wasserstein & Co. still calling the shots for the Rogue Valley gourmet food and gift company whose origins stretch back more than a century, is not reassuring to outside observers, former employees or those whose careers are still tied to the company.

After revenue crested the half-billion mark in the mid-2000s, sales trended down in recent years. When the company was unable to cover its debts, including bond interest payments, it sought court bankruptcy protection on March 28.

While moves made by Wasserstein compounded issues for the Medford-based company, Harry & David's financial woes didn't begin and end with corporate raiders. Rather, a series of absentee ownerships pushed the region's top agricultural employer onto the slippery slope.

For decades, there was a comfortable relationship between Harry & David, as well as its predecessor Bear Creek Corp., and the surrounding community. Long after ownership moved to the other side the continent and then across the Pacific Ocean, it was still considered a hometown company. That changed as profitability waned, turning into snowballing losses; it became apparent Wasserstein didn't share the same perspective.

For many, it was clear Wasserstein had one goal in mind when it acquired the company from Japan's Yamanouchi Pharmaceutical Co. in 2004 — flipping the iconic pear purveyor for a tidy profit. That is, after all, the nature of private equity firms.

"For them, it's a 100 percent financial transaction," said retail industry consultant Bill Emerson, of Emerson Advisors in Florida. "They don't care about the underlying business, they just want to meet their target of getting two times or three times their investment in three years. They are very smart, very shrewd guys, who create a fund with money from investors and banks."

Emerson has experienced and observed the acquisition routine several times during executive and management stints with Linens N Things, KidSpot, Todays Man, TJX, Marshalls and May Department Stores.

He says experience tells him Wasserstein's post-Chapter 11 perspective won't be much different than it was when it gathered up a group of investors to buy the company seven years ago.

Emerson illustrates what typically happens to firms acquired by private equity groups with an off-color tale:

"You meet a very attractive young lady. Then the first thing you do is put her on a starvation diet," Emerson said. "Then you have plastic surgery to improve the body parts and take her on the street to sell her. It's an almost absolutely predictable model."

The model failed, however, when Wasserstein took Harry & David to Wall Street and discovered there were no buyers. Wasserstein announced its initial public offering (IPO) in October 2005, which turned out to be bad timing. A year earlier, a total of 238 companies went public, raising $45 billion. During 2005, the numbers declined, with just over 200 IPO's raising $35 billion as investment bankers began to retrench at the front end of what would prove to be a recession.

The company said the stock offering was designed to pay off debt — bonds issued after Wasserstein bought Harry & David in 2004 from Yamanouchi Pharmaceutical Co., a Japanese drug manufacturer, for about $230 million. Wasserstein sold $245 million of bonds in Harry & David, paid off its debt from the takeover, and paid an $82.6 million dividend to itself and other investors in the deal, according to regulatory filings from the company. Later that year, they took out another $19 million. Wasserstein and others had put up $82 million in cash for the purchase.

The debt burden from the bond payments, combined with Wasserstein management fees, put more burden on the company's floundering bottom line.

The IPO failed to gain traction and in May 2008 was abandoned "due to, among other things, market conditions," Harry & David said in an SEC filing.

"For most IPO's one of the important benefits is drastically reducing the need for additional debt," said George Whalin, president and chief executive officer of Retail Management Consultants in Carlsbad, Calif. "In the case of Harry & David they would have had a better chance of avoiding the current bankruptcy situation. But debt was certainly not the only factor leading to their current problems."

There was a Plan B, but once again, the timing was terrible.

"After the IPO failed, there was an effort to get the company sold, which probably would've worked if the credit markets hadn't dried up," said Brad Earl, former Harry & David vice president and treasurer. "If the credit markets would've held up for another six months, they probably would've ended up selling the company."

Whether such a sale would have been a boon or a train wreck is uncertain.

"If it involved a strategic buyer that would have folded the company into an existing operation, it might have been great," Earl said. "If it was just another leveraged buyer it might have been worse than now."

Long before the fiscal crisis leading to Chapter 11 bankruptcy, however, ultimate control of the company and its profit left Jackson County. Transition to outside ownership began under John H.R. Holmes, son of the company's namesake Harry Holmes.

Ashland resident John Fox III, vice president of strategic planning when he left the company in 1987, said there was some angst when John Holmes relinquished controlling interest to R.J. Reynolds Development Corp. in a $74.1 million leveraged buyout in1986. Holmes became the company's president in 1968 and took the company public in 1976. Two years later, he and other veteran leaders were gone and RJR Nabisco had sold the company to Shaklee Corp. for $123 million.

"Everyone knows what generally happens after a merger," Fox said. "The new owner puts its own people in and those who were there are winnowed out. I don't think anybody resented Holmes selling, but there was some trepidation about what the new guys were going to do."

The mid-1980s transaction marked the last time the majority of the company's profit stayed in the Rogue Valley. Holmes, nonetheless, endeared himself to the rank-and-file when he gave about 900 longtime employees $1,000 each.

"They called it the Thousandaire Club," Fox said.

Shaklee itself was acquired in 1989 by Yamanouchi. For the next 15 years, the company continued to grow under the leadership of Bill Williams and then Nancy Tait. The company expanded beyond its mail-order heritage in the 1990s, adding retail stores to its plate.

Fox, among others, considers the expansion into retail a turning point that led to ultimate decline.

"It was a very nice mail-order company with a wonderful gift line," Fox said. "Once it went into retail, with good fruit available at Whole Foods or Albertsons, it had no chance and it just cheapened the brand. One of the things a mail-order company can do in bad times is cut back catalog circulation. When you're holding 120 long-term leases, you're stuck."

Wasserstein has asked the bankruptcy court to allow it to escape scores of leases as well as to jettison its pension plan. Because a substantial percentage of the bonds were held by Wasserstein insiders or affiliates, it was able to present a pre-arranged bankruptcy plan to U.S. Bankruptcy Judge Mary F. Walrath.

According to court documents, Wasserstein & Co would appoint two board members and the bondholders would name two more. The fifth would be the company's new chief executive officer. If the plan is approved by the court, the CEO would likely serve at the pleasure of a Wasserstein-dominated board.

"Wasserstein and guys involved private equity are only in it to make money; they are the least romantic people I have ever met in my life," Emerson said. "Maybe late at night, they might say this is a great business and maybe we can make it work. But I don't expect that from Wasserstein, that's not what their life is about."

But, he added, no one was forced to sell to the outside corporations, or, ultimately, to a private equity firm.

"When you start selling interest in a company, you lose control and you may go down a path you don't like, but in the end it's your decision."

Reach reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.



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