Waterford finally cracks under debt burden as flaws exposed

 

ANALYSIS:Downturns in its target markets and adverse exchange rates only exacerbated the flaws in a company that was slow to respond to changing tastes and consumer trends, writes Dominic Coyle

WATERFORD WEDGWOOD appears finally to have run out of last chances. The luxury goods group has been in corporate intensive care for so long that the announcement yesterday of the appointment of a receiver came almost as a confirmation of the inevitable.

Receivership does, of course, grant the group one last breathing space. But, given that chairman Sir Anthony O'Reilly and the board headed by US chief executive David Sculley have been unable to attract an investor on firesale terms that would have significantly reduced the holdings of existing investors, the prospects of the business continuing as a unified going concern seem slim.

Over the past five years, the company has undergone six separate fundraising exercises involving a total of €550 million - aimed largely at restructuring the company and trimming its workforce. Sir Anthony, who first joined the company in 1985 - just ahead of its merger with Wedgwood - and his brother-in-law Peter Goulandris have between them poured about €400 million into the group in recent years.

Unite, the trade union which represents most of the workers at Waterford's Kilbarry plant, argued yesterday that the company was "too important to the workers and their families, to the City of Waterford and to the nation as a whole, to let it disappear".

But the company has already petitioned the Government for support. Last April, it asked the State to underwrite loans of €39 million to help fund its latest restructuring plan. By that time, Waterford was restricted from raising further loans from its banks because of the extent of covenants on its existing debt, which exceeded €470 million.

That plea was turned down.

Since then, Waterford Wedgwood has recorded further losses and, early last month, it failed to make an €8.2 million interest payment to investors holding loan notes in the company. That triggered the latest scene in the long-running saga. Ultimately, the forbearance of the luxury group's lenders was exhasuted, leaving it no choce but to call in receivers Deloitte.

To an extent, Waterford Wedgwood has been unlucky. Dependent disproportionately on the United States and, especially for ceramics, Japanese markets, it has struggled with economic downturns in both. That has been exacerbated by long-term adverse exchange rates that have undermined its efforts to return to sustained profitability in recent years.

However, the company has also been author of its own misfortunes. This is particuarly so in the case of its approach to the US market for Waterford crystal. Long after luxury giftware customer taste had migrated to more modern, informal glassware, such as Riedel, Waterford was persevering with its emphasis on more traditional heavy-cut crystal.

Its investment in Rosenthal and deals with designers such as John Rocha for more modern glassware have amounted to "too little, too late".

It also persevered stubbornly with a policy of distributing its range through A-list department stores, ignoring trends that showed customers increasingly buying their homewares at other outlets such as the Bed, Bath Beyond and Williams-Sonoma chains.

Then there was the ill-fated decision to pursue Royal Doulton. While not, in itself, the catalyst for the company's current financial straits, the necessity of pursuing such a deal was openly questioned at the time. The acquisition required the company to tap outside funding at a time when those funds might have been better used to restructure what was an increasingly uncompetitive business.

In more recent years, the company's efforts to chart new strategic directions have been undermined by the scale of the debt burden required to fund necessary changes in work practices - as well as the Royal Doulton deal. All-Clad, the US cookware group acquired in 1999 to bolster the ceramics division and drive future profitability, performed well but had to be sold in 2004 as part of an exercise to pay down debt.

Peter Cameron, who joined Waterford Wedgwood as part of the All-Clad team and took over as chief executive towards the end of 2005, persuaded the company of the need to come to terms with the lifestyle changes of its target customer base and to become more focused in its approach to distribution channels and customer service. However, the company continued to struggle to make headway in sales and profitability.

Last April, David Sculley - a former senior executive at HJ Heinz during O'Reilly's tenure there - was parachuted in with an agenda to aggressively attack costs and an intention to target anew the Asian market. The limited evidence in the interim indicates that his assault on costs was delivering results.

Unfortunately for the iconic luxury goods maker, its workers and its suppliers, the weight of debt pressing down on the company meant time had simply run out for the company in its current form.

The rapid worsening of the economic climate and the collapse of banking confidence frustrated the company's desperate recent attempts to find a buyer.

Waterford Wedgwood continues to house a number of iconic brands but whether there will be any market appetite for elements of the company remains to be seen. The debt burden, including a significant hole in its group pension funds, will only make that challenge more difficult.