Wasserstein haunts Harry & David in buyout doomed to bankruptcy

Freighted company with debt to guarantee 23% gain; 'doesn't pass smell test'

Oct 12, 2011 @ 1:03 pm

Bruce Wasserstein, dead for two years, still casts a pall over the Rogue River Valley of southern Oregon.

There, in and around the town of Medford, more than 2,000 employees of Harry & David Holdings Inc., the century-old seller of mail-order pears and holiday fruit baskets, labor at a company that went bankrupt in March 2011 after private-equity firm Wasserstein & Co. loaded it with debt that it couldn't pay back -- even as Wasserstein's firm took profits for itself.

For decades, Harry & David set the standard for high-quality fruit. Its Royal Riviera pears, sold worldwide, are known elsewhere as Comice, a sweet and juicy variety developed in France that fared even better in southern Oregon, where the soil is volcanic and the winters are mild.

Harry & David's journey from an industry standard for holiday gift giving -- about 60 percent of sales happen from Thanksgiving to Christmas -- to bankruptcy shows what can happen when a private-equity investor like Wasserstein freights a small company with debt, making it more vulnerable to the ravages of recession and competition.

The bankrupting of one of Oregon's oldest corporations riles local officials. Harry & David is the largest non-health- care employer in the region. It hires 6,000 temporary workers every year to pick, pack, and ship fruit. Those jobs are crucial in Medford, a city where unemployment stood at 11.6 percent in August compared with 9.6 percent for the rest of the state.

“Many people here see the Wasserstein people lining their pockets,” says County Commissioner Don Skundrick. “There is strong feeling in the community that they are taking Harry & David down the road to ruin.”

Former employees are angry, too. Medford is rife with executives that the new management fired, and 2,700 workers and retirees had their pensions terminated and shifted to the government-sponsored Pension Benefit Guaranty Corp. after Wasserstein & Co. and other bondholders made dumping the retirement plan a condition for investing $55 million in the company after it emerged from bankruptcy.

Wasserstein & Co. was a sideline for Bruce Wasserstein, the deal savant best known for his role in KKR Inc.'s takeover of RJR Nabisco in 1989. He died suddenly of heart failure in 2009.

Wasserstein & Co., which now invests for his heirs, and another private-equity company, Highfields Capital Management LP of Boston, bought Harry & David for $253 million in June 2004, putting up $82.6 million in cash and borrowing the rest.

Eight months later, Harry & David sold $245 million of bonds, then paid Wasserstein and Highfields a dividend of $82.6 million. Months later, the firms took two more payouts totaling $19 million, assuring them a 23 percent return no matter what happened to sales of fancy pears and mixed nuts.

Harry & David fell victim to a practice that's common in the private-equity industry, says Brian Quinn, assistant professor at Boston College Law School and a specialist in mergers.

Directing a company to sell bonds and then taking the proceeds is legal, he says. Whether it's best for the purchased company is another matter.

“It doesn't pass the smell test,” Quinn says. “They are running this company without anything at stake.”

In the year leading up to the bankruptcy, Harry & David was run by Steve Heyer, a former president of Coca-Cola Co. and chief executive officer of Starwood Hotels & Resorts Worldwide Inc. He riled repeat customers by changing the product line and also pursued promotions, including one with Oprah Winfrey, that boosted costs without lifting sales, according to former employees. In September 2010 Winfrey announced a deal in which Harry & David would sell chicken pies made by the Centerville Pie Co. on Cape Cod as part of her Ultimate Wildest Dreams program to help small companies.

Heyer was a friend of Bruce Wasserstein and a member of the board of Lazard Ltd., which Wasserstein ran from 2001 until his death.

At Harry & David, Heyer collected a salary of $500,000 a year. Wasserstein let him run the company from Atlanta. Early in his tenure, Heyer leased a private jet to fly to Seattle to try (unsuccessfully) to persuade Starbucks Corp. to sell Harry & David products.

Heyer declined to comment.

Heyer's successor, Kay Hong, a turnaround expert from Alvarez & Marsal, a New York-based management firm, commutes from San Francisco. She took the company into bankruptcy and was paid $26,000 a week to run it in receivership, according to bankruptcy court filings. She declined to be interviewed for this story.

Harry & David emerged from bankruptcy on Sept. 14. It had sought protection from creditors in March after Heyer sharply cut prices during the December 2010 holidays, former employees say.

Revenue had been soft in the wake of the financial crisis, and when the holidays were over, sales for the period had fallen 2 percent, to $262 million, according to company filings, while Heyer's discounting drove net income down 56 percent, to $13.8 million. Heyer then warned that it couldn't finance operations without new capital.

Ten days later, Jones and Wasserstein President George Majoros ousted Heyer as CEO and brought in Hong.

When Harry & David came out of bankruptcy, Wasserstein, which had bought its bonds cheap, remained an owner. That means the private equity firm will still have a say in how the company is operated. For the citizens of Medford, Oregon, the question remains whether what's best for Bruce Wasserstein's heirs is also good for the thousands of people who depend on Harry & David for jobs.

--Bloomberg News--

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