Harry & David Files for Chapter 11 Protection

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Harry & David Holdings Inc. filed for a pre-arranged  chapter 11 bankruptcy on March 28th, 2011 after having skipped a $7 million interest payment to bondholders on March 1st.  Harry & David’s sales had declined in recent years, as recession-strapped consumers and corporations cut back on discretionary gift purchases, and new competitors such as Amazon and Edible Arrangements entered the fruit basket business, competing with free/discounted shipping and innovative new fruit basket arrangements respectively.

Harry & David arguably would have been able to ride out the recession without the need for a bankruptcy if its balance sheet had not been weakened earlier in the decade.  Specifically, the acquisition of Harry & David by investment bank Wasserstein in 2004 for $254 million weighed down the company with $250 million of debt, as Wasserstein hastened to pay itself back for the capital it had used to make the acquisition, recouping 1.25x its original investment. The founding Holmes family had sold Harry & David to RJR Nabisco in 1986, a previous peak period for leveraged buyouts, and ownership of the company had changed hands additional times before Wasserstein’s acquisition in 2004.

The company’s bondholders, including Wells Fargo, will become the new owners, as they convert their debt into equity, the “Los Angeles Times” reported.     The company is continuing normal operations on the internet and its 70 remaining retail stores, under the leadership of Kay Hong, chief restructuring officer and interim CEO.  Harry & David’s previous CEO,  Steve Heyer, former CEO of Starwood Hotels, was appointed Chairman and CEO of Harry & David in March, 2010 by Wasserstein, and never moved to Oregon, choosing instead to run the Oregon-based company from his office in Atlanta, Georgia.   In February 2011, Heyer was replaced by Hong, the former CEO of turnaround firm Alvarez and Marsal, when it became clear, after a disappointing Christmas selling season for Harry & David, that some sort of financial restructuring was unavoidable for the century-old firm.