Big Sale At Harrods?

Its controversial owners may offer shares in the tony store

On a normal Thursday morning outside Harrods department store in London's tony Knightsbridge section, more than 100 people are waiting impatiently for opening time. For Californian Patricia Underdown, 55, Harrods is a must-see destination. "I've heard all about this place from my husband. He says we could shop all day, have breakfast, lunch, and dinner in different places, and never leave the store."

Now, the grand British institution and tourist mecca may soon be using its name to attract investors as well as shoppers. Harrods is considering going public, says a spokesman. Sources close to the deal say the possible flotation would be for 20% of Harrods shares, which could raise as much as $600 million. Such pricing implies a value for the company, which includes prime real estate, of up to $3 billion. Sounds exciting--if the stormy past of the store's Egyptian-born owners, brothers Mohamed Al Fayed and Ali Fayed, doesn't get in the way.

After buying Harrods in 1985, the Fayeds clashed with tycoon "Tiny" Rowland, who coveted Harrods, too. Trouble also erupted over a damaging 1990 government report on the brothers' background and source of financing. And Mohamed Al Fayed was embroiled in a 1994 controversy involving Tory members of Parliament who allegedly accepted cash to ask questions in the House of Commons on his behalf.

In all of these affairs, the Fayeds have never been found guilty of any criminal offense. Still, some analysts believe this turbulent legacy could depress the price of an offering or affect the shares later if new squabbles occur. Neither brother would comment, but a spokesman dismisses such fears as groundless.

GOOD SIGNS. The decision to float stock will come this fall. Few observers dispute that the timing looks right. Pretax profits for the company, Harrods Ltd., are expected to rise 28%, to $112 million, on sales of $770 million in the year ended Jan. 27, 1996. A $3 billion valuation for such a small retailer sounds oversized, but there's a precedent. Another luxury London retailer, apparel store Harvey Nichols Group PLC, went public in April and is now trading at 26 times 1997 estimated earnings.

Harrods has improved its operation under the Fayeds, who have plowed $385 million into renovations, opening two new floors of selling space and restoring the store's original Edwardian look. Today, Harrods has possibly the highest sales per square foot in Britain, according to David C. Beale, director of consultant Management Horizons Europe. "Harrods is a very well-managed brand," he says. With the flotation proceeds, the plan is to turn a Harrods warehouse into a five-star hotel next to the store. Also likely is an expansion of the chain of Signature boutiques selling Harrods merchandise at such locations as Heathrow Airport and on board the Queen Elizabeth II. The brothers are controversial. But they have kept a British tradition alive and profitable.

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