By Stephen Nellis Monday, August 9th, 2010

By Stephen Nellis

Staff Writer

Something big was in the works at Harbor Freight Tools, the nationwide discount tool retailer, when a father-son struggle for control of the company broke out in Los Angeles Superior Court on July 14.

The closely held private company was in the midst of moving its Camarillo headquarters to Calabasas. It combed through its executive suite and brought on new officers with deep public company experience, sometimes a signal that a company is considering going public. It had refinanced $490 million in debt.

Company leaders say those steps were all taken to accommodate the rapid growth Harbor Freight has seen because its value-priced tools are selling well in a down economy.

But other experts not directly involved with Harbor Freight said the moves could indicate a major restructuring that typically would lay the groundwork for a merger, an acquisition, or even an initial public offering. The company said a merger or acquisition isn’t in the cards.

These finance and legal professionals also suggest that the timing of the lawsuit was not a coincidence. Founder Allan Smidt may have seen it as his last chance to wrest back control of the company from his son, now the CEO, before a major transaction left him with little or nothing to show for the company he built over 40 years.

In his lawsuit, Allan Smidt, who founded what would become Harbor Freight Tools back in 1968, accuses his son, Eric Smidt, of freezing him out of the company.

Allan Smidt also accuses his son of “looting” Harbor Freight by taking out a $500 million loan against the company and spending some of it on a Beverly Hills estate, a Manhattan apartment and a $100 million painting.

Harbor Freight itself is not named in the lawsuit, but Allan Smidt is asking for the company back and $50 million he says Eric Smidt promised him.

Eric Smidt has not formally responded in court documents. Attorneys for Allan Smidt did not return a request for comment.

Eric Smidt couldn’t be made available for an interview by press time. Instead, he responded to e-mailed questions from the Business Times via prepared remarks sent on his behalf by The Rogers Group, a large public relations firm in Los Angeles.

The CEO said changes at the company — including a new consumer website and additional personnel — have allowed the firm to achieve “consistent double-digit, same store sales increases and attract a total of 3 million new customers. The plan is to maintain that trajectory, opening 28 new stores this year and next.”

“We plan to achieve this growth organically and not through a merger or acquisition,” Smidt wrote.

Eric Smidt also said that new executives, such as Chief Operating Officer Robert Rene and Chief Financial Officer Michael Kaplan, were brought on after the recession started to “strengthen Harbor Freight Tools’ management team.”

Kaplan has deep experience at the Walt Disney Company and Gap, both publicly traded firms.

“When you see them bring in a seasoned executive team with significant public company experience, that’s often an indication that they’re getting their ducks in a row to do something like” file for an initial public offering, said Arnold Brier, a shareholder in the Santa Barbara office of Brownstein Hyatt Farber Schreck.

Some sort of transaction on the horizon could have provided a strong incentive for Allan Smidt to file his lawsuit, said David Lafitte, a corporate securities lawyer with the Santa Barbara office of Stradling Yocca Carlson & Rauth.

Whether it’s a merger or an IPO, a potential partner “would want that cleaned up before consummating any deal,” Laffite said.

The fact that the most of the $500 million Eric Smidt allegedly borrowed on the company’s behalf was refinanced suggests that whatever he did with the money didn’t fall outside of his agreements with the banks, said Mike Pfau, a partner with Reicker, Pfau, Pyle & McRoy in Santa Barbara who has taken companies public.

Eric Smidt said Harbor Freight does not comment on its finances. But it is possible that the refinance was triggered by a violation of an agreement with Harbor Freight’s lenders. Big credit facilities often have provisions that spike interest rates if cash flow or profitability don’t meet certain minimums.

For example, Select Staffing — a closely held Santa Barbara company whose leaders also leveraged the company during the mid-2000s — reworked a $400 million credit facility after an audit revealed that it wasn’t square with its borrowing agreements. The audit came as Select Staffing was considering a going-public transaction that would have netted it $200 million to help it deal with $535 million in debt.

Lafitte, the securities lawyer, said a court is more likely to award Allan Smidt damages than it is to give him back the tool company he founded. “It’s pretty tough to unwind a transaction,” he said.

But with all the activity at Harbor Freight leading up to the lawsuit, its timing seems intended to throw a wrench in the works of big changes that Allan Smidt did not want to see.