Snatching At A Chain

It's not the first time a family has feuded over a cache of jewels. While jewelry retailer Zale Corp. is readying its plan to emerge from Chapter 11 bankruptcy protection, two separate factions headed by different members of the founding Zale family are battling the current owners, Peoples Jewellers Ltd. of Toronto and Swarovski International Holdings of Zurich, for control. But while putting a Zale back in charge of Zale may have some sentimental appeal, the two family-led rivals in this drama lack fresh capital and, just as important, the support of creditors.

They are, however, bolstered by the bankruptcy court's recent decision to allow them to bid for the company. Originally, Federal Bankruptcy Judge Steven A. Felsenthal permitted only the current owners to present a reorganization scheme. But on Sept. 15, hoping to come up with a plan acceptable to creditors, he let the two family groups present competing proposals.

The ruling has heartened Donald Zale, whose father, Morris, founded the company. He's teaming up with his cousin, Bruce A. Lipshy, who was president until 1986, when Peoples and Swarovski bought the chain in a $ 640 million leveraged buyout. "We've got our name on the door," says Zale. "There's a lot of pride associated with our wanting to restore Zale to a healthy company, but we're also eminently qualified to do it."

Indeed, the Irving (Tex.) chain flourished under Zale, who became chief executive in 1971, after his father retired. By 1980, the retailer's sales had nearly tripled, to $ 1 billion, as had earnings, to $ 54 million.

That record doesn't impress Leo Fields, a former Zale vice-chairman and Donald Zale's cousin. He's careful not to bad-mouth his relative, but he contends that, with 40 years of Zale experience, he can do better than Donald Zale and Bruce Lipshy. Fields has joined a team backed by Dallas investment bank Barre & Co., which forced Zale to file for bankruptcy last January, after the company missed a $ 52 million interest payment on its junk bonds. Under the Barre plan, Fields would serve as Zale's CEO. Donald doubts that's a good move. "Leo never actually ran the company," he says, "so how he would perform is very questionable."

`RIGHT PLAN.' The company would test the turnaround skills of any new owners. For the year ended Mar. 31, it posted an operating loss of $ 128 million on sales of $ 1.16 billion. The net loss, after taking an $ 811 million write-off, was even worse: $ 960 million. By offering fewer discounts, Zale should show an operating profit of $ 10 million this year, says analyst Dixon Yee of Oppenheimer & Co., on flat sales.

Peoples and Swarovski still have the confidence of most creditors. "We still think we have the right plan and the right management," says Michael A. Rosenthal, lawyer for creditors who hold 70% of Zale's debt. That plan, which is still in the draft stage, calls for Swarovski to put up as much as $ 100 million in fresh capital.

That's more than either of the two rival groups can offer. The Zale-Lipshy contingent has raised only $ 30 million, and the Barre-Fields group doesn't intend to inject any of its own equity. What the family groups have are ideas. Fields would return to buying diamonds direct from cutters and manufacturers, instead of wholesalers. The current owners dropped that approach when they were struggling under $ 1.6 billion in debt. The result, charges Lipshy: blurred distinctions between Zale's jewelry chains -- including Gordon Jewelry, Bailey Banks & Biddle, and Zales -- which cannibalized each others' sales rather than catering to different markets. In short, complains Lipshy, Zale's new owners "let it go to hell."

Redemption, though, depends on the creditors and the court. Both family contingents are trying to win over enough debtholders to block the other plans. But Gordon's creditors decided on Sept. 23 to back current ownership. In the end, two groups of Zales may not be enough to unseat one group of outsiders.

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