Leveraged Buyouts:  More Background on Toys R Us

We've been closely following the Toys R Us bankruptcy story to try to help our readers better understand the situation. We know that filing for chapter 11 bankruptcy, while a big deal, is still just an administrative step with the goal of an eventual full financial recovery. We know that Toys R Us made some unfortunate business decisions, particularly its poor development of its online portal. However, it is important to know that the basic Toys R Us business model, while certainly flawed and perhaps struggling in some aspects, was still generally successful. We've touched on the impact on Toys R Us by the leveraged buyout which occurred in 2005. In These Times takes a closer look and provides a primer about leveraged buyouts, and how private equity firms are able to essentially bleed a company dry.

In a nutshell, Bain, KKR, and Vornado Realty Trust joined forces to buy Toys R Us when it hit a rough patch. As part of the process, the three firms financed around 80% of the purchase price, and then piled that debt right back into the company itself, on top of the long term debt it was already carrying. The partners then arranged TRU's priorities so that it would be paying off this debt as a priority (so that they wouldn't have to themselves) to the tune of $400M per year. This was at the expense of investing in stores, e-commerce, or long-term growth strategies. The company still managed to perform relatively well within the retail sphere, but the debt eventually caught up to the bottom line, and profits turned into losses starting in 2013. After a failed attempt to bring the company public and walk away with a huge profit, the three partners instead worked on divesting themselves from Toys R Us's impact on their own bottom lines, minimizing the impact of the bankruptcy on themselves.

The article from In These Times gives a nice step by step insight into the anatomy of the leveraged buyout's ruination of Toys R Us, but how it masks the company's actually decent performance over the past decade or so.

Again, remember that the bankruptcy may actually save the company in the long run.

As far as our little corner of the world is concerned, Hasbro still has some Star Wars exclusives on tap for Toys R Us coming up, as many vendors look to assist the company in making it through the upcoming holiday push. These include Poe's boosted X-Wing , Force Link 2-figure combo, a 6" Rey, and don't forget Radio Flyer's crazy rideable landspeeder.

---

comments powered by Disqus