MEDFORD — Harry and David, the Medford-based food and gifts retailer, has turned a corner. The company last week reported $34.7 million net income for the 2011 Christmas season, as compared to $13.8 million in 2010.
But the past two years have been a trial in the Rogue River Valley. The most painful result: job loss and the undoing of a pension plan for 2,700 current and former employees. Taxpayers also took a hit; they had to step in to cover the pensions and fill in payments left by tax loopholes.
The debacle now is being viewed as an abject lesson about private equity firms. In a leveraged buyout, such firms borrow cash, purchase companies and make changes. The hope is that the companies improve performance so they can be sold at a profit. Everyone is supposed to come out ahead. That’s not what happened at Harry and David.
Since 1910, the company had been growing and selling fruit from the ideal climate of southern Oregon. Coveted pears have been Harry and David’s stock-in-trade.
In 2004, New York-based private equity firm Wasserstein and Company paid $252.9 million to seize a controlling interest in the mail-order company, which was doing a healthy business. In 2005, Wasserstein and other investors pulled out more than $100 million in dividends from the retailer. The equity firm borrowed lots of money, racking up debt for Harry and David while charging millions for its own management fees. Then came rounds of cost-cutting, with layoffs and employee benefit cuts. This was a shock for a small town company that had never carried much debt, for 75 years paying as it went the old fashioned way.
In 2010, the company replaced Bill Williams, a local leader who’d been CEO for years. It was Williams and Bill Ihle, a vice president, who through subsidiary Jackson & Perkins decided to offer a special rose in honor of Pope John Paul. Ihle, who was named a Knight of the Order of St. Gregory by Pope Benedict for service to the local church, also left Harry and David and agreed not to discuss the changes.
After Williams, the new chief was Steven Heyer, a former Coca-Cola chief executive whose bold style earned him the nickname “The Tank” in college. He managed Harry and David from his office in Atlanta and took an annual salary of $9.7 million, seven times Williams’ pay.
Later in 2010, with the limping economy, Harry and David filed for bankruptcy, unable to pay bills because of the heavy debt load. The pension plan was gone and creditors did not get paid their full due. Meanwhile, Wasserstein still made a profit.
James Surowiecki of the New Yorker this winter used Harry and David’s troubles to show how private equity firm takeovers can cause problems.Surowiecki said the issue with leveraged buyout firms isn’t job loss — that’s close to the same as at similar companies. Wage depression also doesn’t seem to be worse at bought-out businesses, either. The real problem, Surowiecki explained, is private equity’s skill at gaining wealth from the U.S. tax system.
Wasserstein was able to pay a low rate on its earnings and Harry and David can deduct the interest payments on all the debt. The government helps the pension plan. In the end, regular taxpayers are forced to clean up the mess.
“For an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits,” Surowiecki wrote.
Last fall, the company named Craig Johnson, a member of Shepherd of the Valley Parish in Central Point, as new CEO. Johnson is former chief executive of Musician’s Friend, an online music supply company. He came on board at Harry and David after a turnaround specialist worked to clean up after a Chapter 11 bankruptcy and after the pension plan was unhooked. Johnson did not return repeated calls from the Catholic Sentinel. Neither did officials at Wasserstein.
But Ellis Jones, chief executive of the private equity firm, in 2010 told the Los Angeles Times that the leveraged buyout looked like a good idea at the time. The recession is what created the problem, Jones said.