Harry & David in bankruptcy as gift sales fall

NEW YORK Mon Mar 28, 2011 11:46am EDT

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NEW YORK (Reuters) - Harry & David Holdings Inc, the mail-order gourmet food company, filed for bankruptcy protection on Monday as a weak economy led consumers and businesses to cut spending on its signature fruit baskets.

The "pre-arranged" Chapter 11 filing would give bondholders control of the company, whose roots date back a century when hotel owner Samuel Rosenberg bought some Oregon pear orchards. His sons, Harry and David Rosenberg, later came up with the idea of selling pears by mail.

Harry & David's bankruptcy agreement calls for converting $198 million of senior debt into equity. Normal operations would continue during the reorganization process.

While Harry & David has emphasized the quality of its products, include many it grows on roughly 3,400 acres of Oregon land, holiday sales proved disappointing as the Medford, Oregon-based company resorted to heavy discounting.

"Consumers have become extremely price conscious following the beginning of the 2008 recession," Kay Hong, the company's chief restructuring officer and interim chief executive, said in a filing with the U.S. bankruptcy court in Delaware.

The company also faced increased competition from "big-box" retailers such as Wal-Mart Stores Inc and Target Corp that offer less costly products.

Harry & David's owners include affiliates of private equity firm Wasserstein & Co, once run by the late financier Bruce Wasserstein, and hedge fund Highfields Capital Management, which bought it for $252.9 million in 2004.

Net sales fell 2 percent to $262.1 million in the quarter ended December 25, which accounts for more than half of annual sales. Operating profit fell 56 percent to $26.2 million.

Harry & David operates 70 stores, primarily in malls, and recently closed 52 others. It also sells products such as Wolferman's English muffins and Moose Munch popcorn snacks.

FINANCING

The restructuring calls for UBS AG and Ally Financial Inc to provide $100 million of financing to keep the company operating while in bankruptcy, Bondholders would provide another $55 million.

In addition, UBS and Ally would provide $100 million of financing once Harry & David is ready to exit Chapter 11.

Creditors holding 81 percent of the senior notes agreed to support the company's reorganization plan, and backstop a $55 million rights offering to finance its emergence.

The company said it had about $304 million of assets and $361 million of liabilities as of December 25.

Harry & David's roots date to 1910, when Samuel Rosenberg bought 240 acres of pear orchards in southern Oregon's Rogue River Valley.

His sons began direct marketing in the mid-1930s as the nation was trying to recover from the Great Depression, and in 1938 established the "Fruit-of-the-Month" club.

Harry & David's financial adviser is Alvarez & Marsal, where Hong is a managing director. Rothschild Inc is its investment banker and Jones Day is its law firm. Moelis & Co and Stroock & Stroock & Lavan LLP are advising bondholders.

The case is In re: Harry & David Holdings Inc, U.S. Bankruptcy Court, District of Delaware, No: 11-10884.

(Additional reporting by Santosh Nadgir in Bangalore; Editing by Maju Samuel and Tim Dobbyn)

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