Herz brothers fail to stitch up Escada insolvency
August 16, 2009
By Claudia Rach
Berlin - Billionaire brothers Wolfgang and Michael Herz learnt the hard way that investment prowess does not necessarily run in the family.
The brothers, heirs to the fortune of Hamburg coffee retailer Tchibo Holding, saw their investment in fashion house Escada crumble to a little over E3 million (R34m) from about E75m in mid-2008. Munich-based Escada filed for insolvency on Thursday after running out of cash.
"Escada has always been a wobbly one," said Peter Conzatti, a fund manager at Lupus Alpha Asset Management in Frankfurt, who focuses on small and mid-sized companies. "The Herz brothers risked an investment, and it failed."
The brothers' failed Escada foray contrasts with a more profitable project by Daniela and Guenter Herz, the clan's other siblings. Bought out by the family for about E4 billion in 2003 after a dispute, the two invested in sports-shoe maker Puma in 2005 and reaped proceeds of more than E500m two years later, selling their stake to French retailer PPR.
Michael and Wolfgang rank 224th on the 2009 Forbes magazine list of billionaires, each with a fortune of $2.8bn (R22bn), above Guenter and Daniela at 334th place with $2bn each. Two years ago, each brother still had an estimated $4bn, according to Forbes.
The two brothers were not available for comment, said Arnd Liedtke, a spokesman for their Maxingvest investment company.
Maxingvest's other main assets are the Tchibo coffee chain and Beiersdorf, the maker of Nivea skin cream. Each of the two brothers owns 12.45 percent of Escada.
Like Puma a decade earlier, Escada was a turnaround case when the two Herz brothers arrived. Management upheavals, design flops and a failed expansion into different lines led to almost E100m in losses in the last two years.
Wolfgang and Michael hired Bruno Saelzer, who had led German fashion company Hugo Boss for six years. The brothers also agreed to support a capital increase, under the condition that bondholders would support a refinance package.
That plan failed last week when only 46 percent of bondholders agreed to swap their bonds for new notes and shares, less than the 80 percent threshold that would have enabled Escada to obtain a bank loan and fresh capital. Escada had tried twice to win over bondholders with sweetened conditions.
The collapse affects more than 2 200 employees and risks hurting the appeal of a brand selling $10 000 robes. Known for its use of bright colours, such as pink, turquoise and orange, Escada is worn by stars including Demi Moore and Katie Holmes. Katherine Heigl, who stars in Sony's romantic comedy, The Ugly Truth, wore Escada to last year's Academy Awards.
The five Herz siblings inherited the fortune of Tchibo founder Max Herz before breaking up over different views on the best strategy for the family firm. Guenter, the oldest brother, who led the company after his father's death in 1965, joined his sister Daniela.
The remaining siblings, Michael and Wolfgang, and Joachim, who died last year in a motorboat accident, built the other axis of the clan with the patriarch's wife, Ingeburg.
At the pinnacle of its success, Escada was among the world's largest makers of female fashions. Started by a Munich couple in the 1970s, the company made most of its revenue outside Germany and was popular with affluent female shoppers from the US to Russia with its up-market clothing and accessories that include handbags, sunglasses and fragrances.
Saelzer's predecessor, Jean-Marc Loubier, lasted on the job for a year. Under his stewardship, the company remodelled shops, including its outlet in California's Beverly Hills, to fuel demand. A collection last year was "too dark, and tissues were too heavy" and flopped with shoppers, Loubier said on September 27.
"They were simply unlucky," Ingbert Faust, an analyst at Equinet in Frankfurt, said of the Herz brothers.
"One couldn't have foreseen the development of the luxury goods industry, particularly the breakdown in Russia."
The other Herz siblings proved more fortunate with Puma.
Also on the brink of collapse in the early 1990s, Puma remodelled its athletics heritage into a street-wear image that appealed to urban youths.
The brand spearheaded sports lifestyle, a fusion of fashion and athletics. Puma's share price rose more than 25-fold from the end of 2000 to a peak of E341 in April 2007. The Herz siblings sold their 27 percent stake to PPR for E330 a share.
"It was the right moment to sell Puma after the brand rose from almost nothing to its optimum," said Klaus Kraenzle, an analyst at GSC Research in Dusseldorf. "The other Herzes were clever enough to realise that." - Bloomberg
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