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Turnaround Firm Considers Fingerhut Buy

A member of a group of investors interested in acquiring Fingerhut's core catalog business said yesterday that he would hope the company could become profitable and look toward growing within 18 months to two years.

But he warned that “time is of the essence.”

“If you don't continue to follow through on the model — including mailings, providing product and having sufficient inventory — your business can disintegrate very quickly,” said Marshall Masko, a business partner with Peter Lytle and other investors in the Business Development Group, Wayzata, MN, which is looking into buying Fingerhut, Minnetonka, MN. “You don't want this to take six, eight, 10 or 12 months because that would be the kiss of death for this type of business.”

Masko is a member of one of at least two separate groups of investors who have expressed interest in buying Fingerhut, which owner Federated Department Stores said last week it would close if a buyer could not be found.

“We've signed a confidentiality agreement, and we've not completed our due diligence yet,” Masko said. “My guess is that the due diligence will take several weeks. We know this business very well.”

Masko is the former head of marketing for NordicTrack, Chaska, MN, and was senior vice president of marketing for Gateway Learning, San Francisco.

“Our group specializes in turnarounds, and we've done many in the past several years,” he said. “We're based outside of Minneapolis, and [Fingerhut is] a very well-known and venerable firm. It's a great company that has served its customers very well over the years and competes in a category with very little competition because it affords credit to people who otherwise would be deemed not 'A-1 credit types' by department stores. Fingerhut has offered them easy credit and helped customers manage their credit and watched them so they don't get delinquent.

“It has been profitable in the past, so it has a business model that worked. Also, by returning to the core business, the company can quickly be brought back to growth and profitability. Federated would be the first to agree that the business failed to deliver for them on the e-commerce front, and what they were left with they did not feel was a good strategic fit with the rest of their portfolio.”

When asked about a review of financial information and whether any surprises had been revealed, he said, “I can't get into that. We haven't seen the details of all the financials. But there are some things that were surprising for us.”

Masko said he could not say how much the group is willing to offer until there is a better understanding of assets and liabilities.

“We're still trying to nail that down completely,” he said. “Our group is interested in the whole Fingerhut core catalog business. The way Federated has this organized, there are three catalog groups: the Fingerhut core catalogs that we are interested in purchasing; the Arizona [Mail Order] catalogs; and Figi's. We believe they are interested in spinning off Figi's and the Arizona [catalogs].”

Details regarding changes in staffing levels could not be provided until a better sense of the company's run rate could be determined.

“Two years ago it was a $2 billion company, and now it has a $500 million to $550 million annual run rate,” Masko said.

Fingerhut employs about 2,700 people in a massive distribution and processing facility in St. Cloud. Another 2,000 workers are in operations in towns and suburbs and also at the company's headquarters. Masko said the 2,700 jobs on the line in the distribution center represent 3 percent of St. Cloud's labor force.

He anticipates that the group will consist of “somewhere around seven” investors.

“We have a loose affiliation of 10 of us, and some of us will go in to run the company we buy,” he said.

He also reported that some upper and middle management employees, both current and former, approached the group about an acquisition.

Tom Petters, who counts RedTag Inc., Eden Prairie, MN, as one of his businesses, is leading a second group of investors looking at purchasing Fingerhut. His spokeswoman, Mary Pernula, said that RedTag has no connection to the attempted acquisition and that the “number of investors is not finalized yet.”

“They feel it is a very viable company,” she said. “He is in a fact-finding mode and has had preliminary discussions. I don't have information on who he's been in contact with at this point.”

When asked what Petters' group could do with Fingerhut that Federated couldn't do, she said it was “much too early to consider that at this point.”

Carol Sanger, vice president of corporate affairs at Federated, would not quantify the number of inquiries that have been received and only would say “several.”

“Anyone who contacts us who is a serious buyer is put in touch with Credit Suisse First Boston to initiate the due diligence process,” she said. “The process to wind down the Fingerhut operations is under way. There is nothing that is being done in that regard that is irreversible should a buyer be identified. If a serious buyer emerges, we won't shut down the process.”

Sanger would not discuss a target price that potential buyers would have to offer.

In other news, Federated Department Stores said Jan. 22 that it would close Macy's stores in Birmingham, AL, and Augusta, GA.

Federated, Cincinnati, the parent of Macy's and Bloomingdale's, said 337 employees at the two locations will be affected. Severance packages will be provided for all eligible employees who cannot be placed in other positions within the company.

The closings, combined with the three Lazarus store closings announced two weeks ago, will result in one-time restructuring charges of $35 million to $40 million, of which less than $5 million is cash. Federated intends to make the space vacated by the two Macy's stores available for third parties, or it may use the space to expand the presence of its Rich's/Lazarus/Goldsmith's division. The two Macy's stores will begin liquidation sales early this spring.

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