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Harry & David survives bankruptcy


Local businesses breathe sigh of relief as retailer emerges from Chapter 11


By MATEUSZ PERKOWSKI


Capital Press


The Harry & David Co.'s emergence from bankruptcy has helped alleviate fears about negative effects to southern Oregon agriculture if the fruit basket retailer closed.


When the Medford, Ore.-based firm filed for Chapter 11 bankruptcy protection nearly six months ago, other major fruit growers worried that a potential liquidation would harm business in the region.


"We certainly want them to prosper," said Doug Lowry, CEO of Associated Fruit, a packer in nearby Phoenix, Ore. "It affects other companies that support us if they went out of business."


Some chemical suppliers and other agricultural vendors would likely leave the area if they lost Harry & David's business, affecting other fruit growers, he said.


Pear and peach orchards owned by the company cover 1,900 acres in Oregon's Rogue Valley.


That acreage would probably be torn out rather than taken over by other orchard companies, since most of the pear trees are of the Comice variety, said Mike Naumes, president and CEO of Naumes Fruit in Medford, Ore.


Though Harry & David has been able to find a niche selling Comice pears, the variety bruises easily and is difficult to handle, he said. For that reason, commercial packers prefer the Bosc and Anjou cultivars.


"My guess is it wouldn't be absorbed. It would come out," Naumes said, referring to Harry & David's pear production. "It couldn't come close to being absorbed in the commercial market."


The loss of so much orchard acreage would make the area less attractive to migrant farm workers, reducing labor availability for other fruit producers, he said.


"It adds critical mass to our agricultural community here," Naumes said. "We really hope the very, very best for them. They're very important to our community."


The orchard was originally founded in the 1880s and then turned into a retail mail-order fruit business in the 1930s by brothers Harry and David Holmes, who had inherited the firm from their father.


Since the 1970s, the company has changed hands several times, most recently being bought out by Wasserstein Partners and Highfields Capital Management, two investment firms, in 2004.


The investment firms put up $83 million of their own funds for the acquisition and borrowed the rest of the $253 million, according to filings with the U.S. Securities and Exchange Commission.


Harry & David then issued $245 million in corporate bonds to repay the two investment firms and pay back their borrowed money. The firm's interest expenses shot up since the takeover, averaging about $24 million a year.


Revenues have also suffered in recent years, dropping from about $600 million in its 2006 fiscal year to $427 million in its 2010 fiscal year. That year, Harry & David lost $39 million.


At the time of its most recent quarterly report to the SEC, filed before the bankruptcy in March, the company had total liabilities of nearly $361 million and total assets of about $304 million.


A spokesperson for the company said Harry & David would not comment beyond the announcement that it would emerge from bankruptcy, which happened on Sept. 13.


Under the reorganization plan recently confirmed by a bankruptcy judge, Harry & David will effectively eliminate $206 million of debt by giving bondholders ownership stakes in the company.


Harry & David will also raise $55 million by selling equity in the company.


"Those are very positive signs," said Jay Westbrook, a law professor at the University of Texas who studies bankruptcies.


Only about one in three companies that seek Chapter 11 bankruptcy protection actually come up with a reorganization plan during that process, he said. Of those that develop a plan, only about half actually get it confirmed by a bankruptcy judge.


However, Harry & David's future success will depend on it having adequate capital and its ability to create and execute an effective business plan, Westbrook said. "Those are crucial points."


Of the roughly 200 major public U.S. companies that emerged from Chapter 11 bankruptcy between 2000 and 2005, about one in six went back into bankruptcy within five years, according to a database overseen by Lynn LoPucki, a law professor at the University of California-Los Angeles.


In the current economic environment, Harry & David will need to analyze who their core consumers are and focus on those, said Michael Sansolo, a food industry consultant and former senior vice president at the Food Marketing Institute.


Most likely, the company will find that its loyal customers are in the upscale end of the spectrum -- however, the firm will still need to offer customers a good value, he said.


"They've got to make sure it doesn't cost any more than it has to," Sansolo said. "They have to do a lot of introspection looking how to figure out where they're not efficient enough."



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