Investment savvy not family trait for some Herzes

The collapse of Escada affects more than 2,200 employees and risks hurting the appeal of a brand selling $10,000 robes. Bloomberg News

BERLIN: Billionaire brothers Wolfgang and Michael Herz have learned the hard way that investment prowess doesn't necessarily run in the family.

The brothers, heirs to the fortune of Hamburg coffee retailer Tchibo Holding AG, saw their investment in fashion house Escada AG crumble to little over 3 million euros ($4.3 million) from about 75 million euros in the middle of last year. Munich-based Escada filed for insolvency last Thursday after running out of cash.

"Escada has always been a wobbly one," said Peter Conzatti, a fund manager at Lupus Alpha Asset Management GmbH in Frankfurt, who focuses on small and medium-sized companies.

"The Herz brothers risked an investment, and it failed," said Conzatti.

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 4 billion euros in 2003 after a dispute, the two invested in sport-shoe maker Puma AG in 2005 and reaped proceeds of more than half a billion euros two years later selling their stake to French retailer PPR SA.

Michael and Wolfgang Herz rank 224th on the 2009 Forbes magazine list of billionaires, each with a fortune of $2.8 billion, above Guenter and Daniela at 334th place with $2 billion each.

Two years ago, each brother still had an estimated $4 billion euros, according to Forbes.

Turnaround case

The brothers were not available for comment, according to Arnd Liedtke, a spokesman for their Maxingvest AG investment company. Maxingvest's other main assets are the Tchibo coffee chain and Beiersdorf AG, the maker of Nivea skin cream. Each of the 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 100 million euros in losses in the last two years.

Wolfgang and Michael Herz hired Bruno Saelzer, who had led German fashion company Hugo Boss AG for six years.

The brothers also agreed to support a capital increase, under the condition 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.

Pink, turquoise

The collapse affects more than 2,200 employees and risks hurting the appeal of a brand selling robes for as a much as $10,000.

Known for its use of bright colors such as pink, turquoise and orange, Escada is worn by stars including Demi Moore and Katie Holmes. Katherine Heigl, who stars in Sony Corp'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 strategy of the family firm.

Guenter, the oldest brother, who led the company after his father's death in 1965, joined forces with 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 United States 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 remodeled 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.

'Simply unlucky'

"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 remodeled its track-and-field 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 341 euros in April 2007.

The Herz siblings sold their 27 percent stake to PPR for 330 euros 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 GmbH in Dusseldorf. "The other Herzes were clever enough to realize that."

Bloomberg News

(China Daily 08/17/2009 page11)