How vulture capitalists ate Toys 'R' Us
theweek.com
theweek.com
Anyone who despises private equity should be celebrating this story, in this case, KKR/Bain/Vornado were the suckers in the deal, they bought the rotten apple and suffered massive losses because of it.
https://www.nytimes.com/2004/08/12/business/toys-r-us-says-i... https://www.nytimes.com/2005/03/18/business/company-news-toy...
Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. The losers were Toys R Us employees and customers and the banks who provided the loans.
Bain et al lost over a billion dollars. Not only did they invest the equity, they also loaned some of the debt out of their own funds.
As in where did the proceeds go? To the previous investors. From whom KKR et al bought Toys 'R' Us. There's a "B" in LBO.
The firms got $470 million in fees and interest against their $1.3 billion investment [1]. Bain et al lost money. These numbers were disclosed in SEC and bankruptcy filings.
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
Although I was initially inclined to agree with the tone of the article, just the numbers in the article itself disproved it's main thesis.
Near the end: > "Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership."
Near the beginning: >"The trio put up $6.6 billion to pay off Toys 'R' Us' shareholders. But it was a leveraged buyout: Only 20 percent came out out of the buyers' pockets."
Net, using these numbers, is that the buyers put in $1320 million and took out $200 million, a net loss of $1.12 billion dollars. This doesn't mention the $5Billion lost by the other investors (minus whatever interim payments were made).
The board and shareholders did well to get out when they did, and I'd hypothesize that the employees, while still losing jobs, had the jobs with the buyout for years longer than they otherwise would have.
So, you are claiming that the author somehow didn't find over a billion dollars in fees for them to break even over 15 years? If so, he's a pretty incompetent journalist. And, even if there are a billion in 'hidden' fees, they still lost money.
For them to have made even a modest 5% interest for 15 years, which is a very modest/baseline profit goal for finance pros, you'd need to find almost $2billion in missing fees.
So, where's the money?
Additionally, walking out of a store with something is a nice experience, maybe reading the manual on the way home, instead of waiting a week to get something unless you have prime or pay for faster shipping.
Amazon is definitely convenient, but it's sad to see Toys R Us go. Stores like that provide a real added value in my opinion.
You only think it's better reading the manual on the way home and not waiting a few days because you're still riding that emotional high.
I much prefer the Amazon approach where feasible, because that detachment helps you keep a more level head while purchasing, which reduces the expenditures on frivolities and you'll have more savings for more meaningful things later.
I kind of doubt that this is really the case in practice. There is detachment from the walk by impulse buys. But there is also detachment from the part where you spend your money. One click purchases are just too easy.
And Amazon suggestions are getting better all the time at convincing you to buy more and more. Not to mention the discounts on auto delivered products.
The store can only entice me when I decide to get in a car and drive there and walk in. Amazon is just a click or tap away from absolutely anywhere.
I don't see the big deal with a few impulse purchases as long as it's not hurting the family budget.
There's enormous effort expended on this by stores - because it works.
I feel this era is going way too much into sound/engineered decision making for mundane human life, and I say it's detrimental.
Toys R Us is a pretty basic economic transaction. They sold toys, and the people buying them get the value. We're not dealing with public goods or externalities or any other type of market failure where this type of value might be tricky to pick up.
Couldn't see what the value add was. I'll take my local toy shop, thanks.
On the other hand, a toy store is stocked only with management's recommendations. They're not fools, either, they only stock what they expect to sell well - mainstream, right down the center products.
+ YouTube + Amazon: Lets kids see what a toy looks like in HD, whereas previously you'd need to go to a store to see the big images on the box, or to press the "try me" buttons. As you said, the brand drives most of the sales, so the store experience adds little.
+ Advanced Supply Chains/McDonalds: The toys in Happy Meals are insanely nice, I wouldn't be surprised to see them retail for $5-10 at a toy store. High-quality toys are throw-ins for a lot of stores now, obviating the need for a special purpose store, save for Christmas/Birthdays.
+ YouTube + Grocery Store: The rise of Surprise Eggs over the last few years has been astounding, to the point that a decent amount of our toy budget is spent at the checkout line at the grocer, where these eggs are increasingly on offer.
+ YouTube + DIY: The explosion in popularity of DIY slime is another development where tactile time is invested in a project rather than a packaged toy.
+ Apps: The YouTube Kids app and the many thousands of quality games on offer in the app store are great substitutes for plastic junk.
No doubt debt played a role, but I think almost every story has underplayed massive changes in the toy market that are an additional headwind to the industry.
I avoid certain stores in order to avoid the whole "I want this, I want, I want, whine whine" in the store and then at the checkout. I understand Toys R Us playing to this, going in you know it's going to happen...
but rather than really trying to increase it with impulse things at the entrance and then at the checkout, especially with things like candy, they could innovate.
Giving the kids a scanner like some of the walmarts have available and letting them zap all their wants, like some stores have with wedding registries, then letting them print a list or send to an app and then be able to sort by most wanted, etc - easy sharing.. could increase sales, and take care of the whining problem for example.
I'd also support a non candy aisle by spending more money if it had fresh fruit / veggy snacks for example, and I think others would as well.
The wall street greed that pushes some of these methods of selling is backfiring in some ways that are uncountable - if your app could detect the times I need something, yet drive by your store because kids and your impulse check out aisles..
Why waste money on things that get an initial "wow!" - only to be tossed into a pile and never used, when there are tons of privacy stealing ad supported free things that take all the time and attention.
Last holiday I looked through the TUS online and offline catalogues for 10-12 age range, found 2 things that may be interesting to the youngin' here; one was a watch.
Strangely card based games like pokemon yugio mtg can actually get groups of kids involved without the need for electronics, but I don't think those alone would keep a large warehouse in business. I am also not driving across town when target has the card packs a mile from here, and specialized card shops are all over town.
I did see TUS expand it's electronics section, but the ad supported freemium models don't sell many games, just hardware once every so often.
Sad to see TUS go, unlike GP commenter, I don't think the author is crazy, I believe that shareholders often influence places to make decisions that may raise profits in the short term yet lose the war after a couple of years. It may not be the only reason, but I'd wager it's one of the main ones out of the top 10 perhaps.
Our local Target has some choice of baby stuff but nothing like babies r us has. And with the problems of fakes I've ran into on Amazon, I would NEVER trust them with something like a carseat.
Well, they earn huge payouts because of the risk involved, which is plainly clear in this case.
https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...
These are charged to the fund (i.e. the investors), not the company. PE firms charge companies transaction fees. "Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1].
Private equity isn't VC. When a holding goes bust, the fund loses a lot of money. That, in turn, sharply limits what fund managers can do and how much they can pay themselves, including from other better-performing investments.
[1] https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...
Yes, we do. It's disclosed in SEC and bankruptcy filings; they lost money [1].
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
Marketplace says that Bain and KKR made money off of the deal.
https://www.marketplace.org/2018/03/06/business/toys-r-us-an...
"The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million."
With all due respect to you, the author of that article doesn't understand how PE funds work. (Most people don't. But one shouldn't write an article if that badly misinformed.)
Private equity funds are structured assuming portfolio companies won't vanish. They may lose some money. But between 1998 and 2010 only 4.9% of PE-backed companies defaulted, and of those, 72% did a Chapter 11 or pre-packaged bankruptcy [1]. As a result, when funds get fees or interests, the general partners are allowed to pay themselves a little something up front. If it turns out they overpaid themselves in year 1, they can make up for it by underpaying themselves in year 7.
Which makes a liquidation, like this one, nasty for the managers. First, their high water mark is toast. Second, most of that $15 million will find its way to the fund's limited partners. If the fund paid out its managers, clawback terms could be triggered. That means fuck year 7, you return the overpayment now.
Private equity managers are smart. But their limited partners aren't dunces. We've gone through cycles, up and down, with PE. The terms have "learned". Liquidations of PE-backed companies are rare. Nobody is walking away from this happy or whole.
[1] http://portal.idc.ac.il/en/schools/economics/about/documents...
This isn't equivocally true. It all depends on how levered the investment is and how much debt they pulled off the books to pay back the banks (or their fund). The stereotypical PE fund looks like this: buy company for $100M with 50% debt and 50% equity. Meaning, investment banks give them $50M to buy the company at market rates and the PE firm spends the other $50M from their fund. Load the company up with debt and then pay off the senior credit facilities with the profits while the business slowly dies. In other words, it's very possible that PE firms and their lenders earn profits even if their portfolio companies go bankrupt.
In the case of Toys R Us specifically, it appears they did a 17%/63% levered split...which frankly is exorbitant. Most market norms are more around 50/50:
sank $1.3 billion of equity into the takeover of the Wayne, New Jersey-based toy company, financing the rest with debt, according to company filings.
https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
> That, in turn, sharply limits what fund managers can do and how much they can pay themselves
What are you referring to when you say "fund managers"? The LPs? The LPs are super diversified, so that's irrelevant. The GPs make their base salary from management fees and their bonus from carry on the return of the fund. The idea that a fund "loses" money isn't that black and white...their are intricacies into how this plays it out.
Source: Wife is a PE firm founder and I advise PE firms.
Losing a dollar is losing a dollar, diversified or not. The investors in these PE funds lost money. Where they net out against other investments is irrelevant.
> GPs make their base salary from management fees and their bonus from carry on the return of the fund
Salary, yes. But good luck earning any carry on this fund. (They'll be lucky if DPI crosses 1x with a hole this big.) Agree that PE accounting is complicated.
Again, depends on who's left with the debt...the typical large cap PE playbook is to hand the debt off to the company, while the PE firm and the senior debt have been paid off by the time the company gets liquidated. I haven't reviewed all of the financials and the SEC filings, but normally if you're levered at 63%, then it's likely they were able to pay off the equity in short order.
See case study here: https://d1ge0kk1l5kms0.cloudfront.net/images/G/01/books/stec...
Another trend that was gaining popularity in the private equity industry involved rapidly accessing the capital markets after closing a deal to raise cash to pay a large dividend to the private equity owners. Firms typically used the debt markets to finance these dividends, creating more highly levered, riskier companies. In some cases, dividends paid to private equity firms within one year of their original investment equaled the original equity commitment. In the Hertz LBO transaction, Clayton, Dubilier & Rice, Carlyle Group, and Merrill Lynch collected $1 billion in bank-funded dividends six months after buying rental car company Hertz for $15 billion.6 About four months later, Hertz issued an IPO to pay off the debt and to fund an additional dividend, resulting in total dividends paid to the owners that equaled 54 percent of their original investment of $2.3 billion (still leaving them with 71 percent ownership). Private equity funds also took cash out of their portfolio companies to pay large “advisory” fees to themselves. These fees exceeded $50 million on large transactions during the buyout phase and annual fees often continued throughout their ownership.
In that same article they mention Toyr R Us had ~$600M in EBITDA in 2005 in which they could have easily paid off at the initial $1.3B that the PE firms put up in equity financing. They also paid 9x (!!!!) EBITDA for a Retailer....that's a ridiculous multiple with highly unlikely outcomes for multiple expansion. So you only have three options (1) debt pump and dump (2) consolidate the back-office (3) buy add-ons.
This is all leads me to believe that the real suckers in this whole thing are the current debtors. Pure speculation on my side, but I really believe that Toys R Us was already on it's way out (e.g. Amazon). Bain/KKR trying to find deal flow where none could be found, figured they had two viable intertwined paths (1) try to sell it to Amazon (2) load it up with so much debt that if they couldn't sell it to Amazon, they wouldn't lose money if they paid themselves back before it went into bankruptcy.
Capitalists place bets in things that go down too.
PS - 1x DPI ain't terrible in a seller's market (which it has been for large cap in the last 10 years). I'm not sure what KKR or Bain fund this deal came out of, but the real truth will be in there.
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-... [2] https://www.reuters.com/article/us-usa-tax-privateequity/u-s... [3] https://www.thedailybeast.com/republicans-love-welfarefor-th...
They invested $1.3 billion. The interest payments were deductible to Toys 'R' Us, which would have been useful if it survived long enough to pay dividends to its equity holders. KKR et al lost money on this.
I think it's hard to say conclusively without being their tax accountants/lawyers:
> > all the debt payments are tax deductible
After declaration of bankruptcy, they probably get tax credits they can use in the coming years... Excuse my inexact terminology, I'm not an Accountant.
Because it is fashionable to assume everyone on Wall Street just makes tons of money at the expense of Main Street, which is a gross oversimplification of what is occurring in today's society.
Maybe. It was already on a downward spiral. There's pretty much zero evidence that, left as a public company, they'd have figured out a way to reboot. It's not like there aren't plenty of other retail chains in dire straits.
Bain and KKR's turn-round strategy was largely a joke: They basically floated a bunch of trial balloons to the press, arguing that they weren't going to just be a toy store anymore (basically become a walmart or target) but that was scuttled. After that, they just decided to control costs as tightly as possible. Very little innovation.
Prior to the buyout, there was a team inside Toys 'R' Us that was trying to clone Amazon's e-commerce success. It died with the buyout. Bain and KKR thought they had a better plan: they didn't.
Everyone wins except for whomever was stuck holding the bag on the debt.
If we flipped roles, with the team inside Toys 'R' Us trying to control costs before the PE firms came in and tried to make Amazon competitor, it would sound equally damning.
https://www.wsj.com/articles/overheard-amd-cutting-costs-141...
I'm rarely a defender of leveraged buy-outs, but in this case, I think it was a good thing. Private investors took a moribund business and attempted a turnaround. If they succeeded, everybody would have won. If they failed, a long and tortured slide into irrelevance got aborted and cut short.
These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.
It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.
Limited downside seems accurate
You have to be careful when you get vindictive at rich people; they're also the employers, and it's hard to build a system where such people aren't "the rich".
(If you hard-core leveled everyone in the world to equal wealth, nobody would be able to employ anybody else in the current sense of the term. People would have to pool their money and give it to somebody or set of somebodies to manage. And lo, watch "the rich" appear again as the people who successfully employ others get a return, and those who fail do not. It's really hard to avoid "the rich" also being "the employers".)
I can pretty much guarantee someone, probably multiple someones, were called on the carpet at these firms, and did not get the "Oh well, just try again good buddy!" treatment.
I can't speak for the person you replied to, but how about this? Less downside for the workers. We're talking about thousands of people losing their jobs. These people then go into a smaller labour market where they compete with other vulnerable retail workers, affecting far more people.
If we want an appropriate measure of downside in a situation like this, we should look at all of the externalities. Few people ever do, though, and society marches on.
Amazon is a lot more profitable than Toys R Us ever was but that doesn't mean they make the job market, let alone society, healthier.
It sucks, and there’s nothing you or I can do about it ... but pretending that this is actually a good thing for anyone but a handful of rich guys who will have made out like bandits on the whole debacle is just fantasy.
And sure, it's weird to contrast a theory of firm destruction being necessary for a vibrant economy with the reality of individuals you can point to losing their jobs but the fact remains that doesn't really distract from the truth of my statements. Just because it's a bit harder to point at specific individuals who will benefit from the demise of Toys R Us doesn't mean the link isn't real.
...which is still lower than it's been since 1986 [1], and is significantly lower than Australia, Japan, Britain, Canada, Germany, France, and Sweden [2].
[1]: https://data.bls.gov/pdq/SurveyOutputServlet (set from to 1948 and click "Go")
[2]: https://www.motherjones.com/kevin-drum/2017/12/raw-data-the-...
Capitalism have built assumptions to its origins that protect capital holder: divine right was often used in the era of its origin
The US Constitution considered landowners above others due to them contemporary belief of divine rights
Our contemporary system is built upon historical record
There’s historical record that plainly shows humans deciding to write a law this way because it favors company X or ideology Y
There’s plain historical record that shows obstructionism to social evolution in favor of entrenched players
And scholars and academics measure THOSE results
So your argument is based upon built in bullshit
Economists have been PAID to peddle bullshit, corrupting their facts
My god I can’t even. Is this really what they teach in college now? Economics and physics are one and the same despite a ... there are decades of government documents detailing their collusion and manipulation of invention and investment for the benefit of power players
But yeah our contemporary economy is a greenfield implementation lol
The main thing is that just I hate that otherwise smart people find it so easy to "other" a big group of people and find ways to back their belief that ultimately this groups suffering is just and good. It's not. As I said, maybe we can't do anything about it ... but the least we can do is not be so fucking smug about it.
Rant over.
You're missing the big picture. People in e.g. China are better off now because they are enjoying the upside from wage growth. Americans enjoyed this in the 1950s, but the ensuing globalization meant the improvement in wages would go to the lowest paid workers. In theory, once developing nations reach the same minimum wage as the U.S., American workers will start reaping the rewards of increased wages. In the meantime, Americans can pat themselves on the back for having a strong currency, cheap products made with cheap Asian labor, a great justice system, and employment and education opportunities galore.
The globalization genie is out of the bottle. It's not a matter of being able to afford to think the country as a big system -- you're the one who's myopically looking at it from the perspective of a cherry-picked subset of workers.
Americans can either wait until the developing nations catch up or they can invest in education (and write legislation) to bring more workers into the 21st century. Swimming against the tide of globalization is akin to fighting the Industrial Revolution -- I suggest giving up on that idea.
So in essence they are no worse off than if it didn't happen.
Expand your time horizon a bit. Having freed up the malinvested resources, other enterprises will arise which will hire them, at jobs that are now almost by definition more solid than the one they left behind, since the one they left behind couldn't sustain itself.
"But what if they can't wait around?" They don't necessarily have to. The job market is not so tight that one job has to instantly open up as soon as one person is fired. There is some fluidity in it. The only place there will be any particular trouble would be around the HQ of Toys R Us; the individual stores are going to be in economies where the store going out of business is just a tiny blip hardly affecting the local retail employment environment.
"But what about the permanently unemployed?" Well, if you're used to the "new normal", be sure to have a look at the current unemployment trends before getting too far into that sort of argument.
And you have to consider the flip side as well. What if you got to go to work for Toys R Us, and it was guaranteed that you would be employed indefinitely there no matter how badly things went for Toys R Us? Sweet deal, right? Well, sure, but it's not going to be unique to Toys R Us, right? It's going to be the deal for everybody. We've got experience with what that "sweet deal" produces; read about the Soviet Union's economy. Would you rather have to find a new job every so often and live in the US, or be stuck in the Soviet Union? We don't have to hypothesize the answer to that; people are still falling over themselves to get into the US.
It is vital that people understand that creative destruction trades some short-term inconvenience for massive long term wins, lest we foolishly legislate short-term conveniences for massive long-term losses because we collectively stopped understanding the full story.
Continue piling onto the stash already very wealthy people have is primarily all this economic activity is accomplishing now as they crater retirements, cut healthcare or inflate prices out of the reach of the majority (which globally ~80% lives on ~2.50/day.)
What’s the point of 40-50+ hrs a week for me now if some whithered old geezer can change a law and flush the effort down the drain
How about meet basic utilitarian needs of food and healthcare, common ones of all humans, in the domain of the government
And what we spend on time on otherwise is up to us. Let’s all punch a clock to make earrings and baubles to support the ephemeral economy? Why does one need to be compelled to make consumer garbage? Oh cause stock prices or we can’t anger a small portion of the population: rich people
They have no divine right to wealth you know?
It’s self eating shitshow of stupid ideas that reinforce stupid ideas.
Steve Jobs is right: none of the rich are any smarter or more capable than your avg college grad. They just got lucky sooner
Physics and economics are not one and the same.
Ownership is not divine and should be treated as such.
Paulo Freire and others are better at explaining the reality.
This forum is a wasteland of neoliberal babies who want to build a giant castle to their egos and live in it.
Grow up a bit. Be less ignorant of history and stop fetishizing economic output.
If we have to motivate the species so hard to produce, perhaps economy is inherent to our biology.
But next quarter growth or bust!
Clueless rubes
https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
https://www.marketplace.org/2018/03/06/business/toys-r-us-an...
"The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million."
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
$270M over 13 years from $1.1B in loans? ($270M = $470M - the $200M in fees.) That seems incredibly low interest. I am suspicious. LBO firms do not give low interest loans to their targets.
If we assume an interest rate of 5%, you get 50M in interest a year on 1B. 13 years will yeild $750M in interest.
Did these LBO firms really offer loads at something like 1.5%?
Something isn't adding up.
They hold less than 20% of the debt. Most of their investment went in as equity. That's wiped out.
> LBO firms do not give low interest loans to their targets
PE buys equity and subordinated debt. Sub debt has high rates and wonky structures. In this case, I believe it was pay in kind, "a type of high-risk loan or bond that allows borrowers to pay interest with additional debt rather than cash" [1]. Nice feature if the debt is repaid. Less fun when it's wiped out.
Private equity paid the original shareholders for Toys 'R' Us. The limited partners in this fund (and creditors) lost a lot. The managers extracted their management fee, but that's basically only salaries. Good salaries, but none of the 20% of the upside that makes people in PE rich.
I agree that workers are left out. Employees in private-equity acquired companies should get (a) stock (or better yet, an interest in the diversified fund) and/or (b) enhanced downside protection (e.g. longer or bigger unemployment benefits, paid for by the private equity fund). But in this specific case, employees didn't turn out that much more badly than they would have otherwise. (For those who might have lost their jobs in the next recession, their lot was arguably improved.)
Management fees in this case were $200 million. That's a pretty nice salary!
"Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1].
(Toys 'R' Us did pay the PE consortium "$470 million in fees and interest" [2], but the vast bulk of that goes to the fund, i.e. the people who just lost a billion dollars.)
[1] https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...
[2] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
>Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership.
TL; DR Nobody on the Toys 'R' Us deal teams at these firms is happy about this, and all will find their lives in the industry a little bit harder going forward.
The hypothetical buggy whip manufacturer sometimes survive at 1/100th the size and or grow in other directions.
One of the reasons why they get loans so easily is because these are asset-heavy investments minimizing the downside risk for the banks. As there are usually plenty of real estate and inventory to get at least some of the money back during bankruptcy. Which is why we see it so often in the big-box retail space.
There are plenty of investors who would lose out as Toys-R-US dies a slow death as well. Instead they were bought out earlier in the process at a relatively decent rate and the risk is shifting from the public market to the banks and private equity firms.
I'm not a big fan of these financial-market gambles and obsession with high-growth industry as the only viable model, but there was voluntary sales by the original owners/investors, as they saw it as the best ROI at the time vs a fragile future.
And as this company fails, that still means there is a market not being tapped for retail toy sales and smaller firms can come in to provide that value/jobs, at a size and business model better suited for the nature of the current market. Or other firms can absorb it such as Walmart by expanding their own offerings.
The assets don't disappear. They're just being re-purposed earlier. Toys 'R' Us locations nationwide are being purchased and turned into new, arguably more-useful, things.
Are you accounting for general economic climate? Toys 'R' Us locations appear to be getting purchased [1][2]
[1] https://www.bizjournals.com/bizwomen/news/latest-news/2018/0...
[2] https://www.ctvnews.ca/business/toys-r-us-ends-canadian-stor...
Regardless, the capital that would otherwise be invested in this poorly performing enterprise is now invested somewhere else, so everyone is better off.
These things really have to be considered. Imagine a gym in an extended decline. Its locations and machines will not get enough maintenance, and will lose value faster, thus losing more customers sooner too, which will make extend-and-pretend yield even worse results. Better fail quickly or find management that can turn things around.
I am not saying a company should continue past profitability, but huge amounts of debt shift the line and kill off many salvageable companies while destroying a great deal of wealth.
We got 14 years out of full Toys R Us experience out of this, and the writing on the wall should have been clear in 2004; how many failing retail giants had a good long term outcome from this type of buyout?
An unprofitable company is an overall loss by definition - sure it's providing some value to some people, but it's consuming more value than it produces.
Killing the company quickly frees up the things it was consuming to be used for more productive things. Those buildings can be used for better businesses, or replaced with housing or parks or what-have-you. Other companies can offer better jobs to those workers (we're at close to full employment at the moment, and declining companies are not fun or fulfilling places to work). Money that was invested in that company can be put to more productive work in other businesses.
The impact of the death of ToysRUs will be significant to the toy industry as a whole, as Walmart/Target only devote a couple of hundred linear feet to toys, and Amazon has killed the little shops that powered the long tail.
"The departure of Toys 'R' Us from the retail landscape will give a boost to neighborhood toy shops.
That’s according to the American Specialty Toy Retailing Association, which predicted that 2018 will be the best year yet for neighborhood toy stores nationwide as consumers flock to these stores in the wake of the closure of Toys 'R' Us."
https://www.chainstoreage.com/finance-0/group-predicts-boom-...
To the extent that vendors were relying on being propped up by an unprofitable Toys R Us who bought their product for more than it was worth, it's the same effect one level up: those vendors were consuming more value than they produced.
If the company had successfully paid back the loans then they would not have failed, but often when that happens private equity simply takes out more loans until the company fails. In such cases failure is both profitable and by design because they effectively sell the company to banks for more than it's worth while profiting from the difference.
This is incorrect.
"PE-backed firms are no more likely to default than other firms with similar leverage. Distressed PE-backed firms restructure more out of court, restructure faster, and are more likely to remain an independent going concern following the restructuring, compared to leveraged borrowers that are not PE-backed...Hence, PE investors do not exacerbate the likelihood of financial distress and seem to resolve distress more efficiently than other firms."
Furthermore, "companies that were previously owned by a PE fund that [have] exited within the last five years have nearly a 50% lower default probability than other firms in the sample, including non PE-backed firms with no history of PE ownership. Consistent with the findings in Harford and Kolasinski (forthcoming), this result suggests that PE firms leave their portfolio companies in relatively strong financial shape when they exit."
All in all, PE-backed companies default about 5% of the time versus 3% for population (Table 2).
http://portal.idc.ac.il/en/schools/economics/about/documents...
As to over leveraged, the most attractive targets for PE is when the companies assets are worth more than their stock. That's the opposite of being highly leveraged. Remember, profit and assets are two very different things and a company can lose money while still having a lot of capital.
For example, he notes that they'll have to write off their investment in Toys R Us, but makes it sound like they're making out like bandits because they got $200 million in management/consulting fees out of the deal. So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me.
More importantly, what if this had been a success? What if they had bought Toys R Us and orchestrated a phenomenal turn-around? Would this still be a story? Would they be evil, but this time they'd be evil because they stole a public company for pennies on the dollar (a la the Dell lawsuit) and made bank when it returned to growth and profitability?
A significantly more dispassionate discussion about the debt burden that goes along with a leveraged buyout would have been far more interesting to read.
> So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me.
They only had to put up 20% of the 6.6B, thus $1.32B. The rest was put up by bond investors I believe.
TRU was also paying upwards of $425M per year on the debt it had. Assuming that 20% of that was to the holders of the $1.32B debt, you get $90M of interest payments. Given that the LBO happened in 2004, there have been 13 years of interest payments, which totals now $1.1B roughly. I am unsure if any principle was paid off, there are no details for that.
Thus $1.1B in interest + $200M in management fees = $1.3B of their investment, discounting inflation adjustments.
Basically KKR, Bain and others are at least close to net zero even though they caused TRU to fail completely.
Lastly, bankruptcy just means that it is insolvent, it doesn't mean that the current debtors get nothing. If the debtors in this case had control over TRU they can ensure it goes bankrupt early enough that it can cover the liabilities to its debtors, namely themselves. If the debtors can get even 50 cents on the dollar, they are net winners.
This is a very poor assumption. The PE firms bought equity in TRU, they are not paid back in the same way and on the same schedule as holders of debt.
> The trio put up $6.6 billion to pay off Toys 'R' Us' shareholders. But it was a leveraged buyout: Only 20 percent came out out of the buyers' pockets. The other 80 percent was borrowed.
I misjudged, I thought all of it was borrowed, just 20% was from the LBO firm.
The actual total was $470 million [1]. KKR et al lost close to a billion dollars. They will see zero recovery on their equity and close to zero recovery on their junior claims.
[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
The direction US brick-and-mortar retail is headed is dollar stores at one end and luxury goods at the other, with little in between. Dollar General opens about 900 stores a year.
[1] http://theweek.com/articles/697378/what-caused-retail-apocal...
https://www.google.com/search?q=%22toys+r+us%22+%22leveraged...
My understanding is the debt was so high the lenders figure anything that happens is just throwing good money after bad.
Whenever these stories about buyouts occur, it is framed as the buying company being the agent who has decided the future. e.g.
> if Bain, KKR, and Vornado had never come along
Why does no-one ever mention the board of directors who decide to put it up for sale?
Are they not the true agents in this story?
> Toys 'R' Us wouldn't be doing stellar, but it probably could've muddled through.
Bright, colorful, and passive. https://duckduckgo.com/?q=toys+r+us+shelves&bext=lcl&atb=v11...
Those buying it, and those providing the loans to buy it, lost a lot of money on a bet that they could turn it around. They lost the bet, and so be it.
The previous shareholders got paid and were able to move their capital out into something they believed would provide better returns.
Sure, a lot of people lost their jobs. On the other side, a failing business that could likely not afford to pay well went out of business, and someone else will come in, buy the property, and need new employees.
This isn't as bad as the article makes it out to be. If anything, its good that capitalists tried to turn it around, quickly failed, and now everyone can move onto other things.
Slowly fading into oblivion over decades is not a good thing either.
https://www.rollingstone.com/politics/news/greed-and-debt-th...
You want someone who actually know's what they're talking about? Read Matt Levine's writings on Bloomberg.
Purely anecdotally, but I am typing this on a Dell desktop and regularly use a Dell laptop and I am very happy with both, I am particularly happy with their Linux support.
I mean it's way harder to die if you combine dell, emc, pivotal, rsa and vmware...
Most of the time people make money on them -- sometimes a lot of money, if the timing, the target, and the fit is right. This wasn't one of such cases.
I highly recommend you watch the movie or read the book if you don't know about it. The movie is excellent.
Knowing that sequence of events, I feel like people should have realized that all of this would happen to Toys R Us.
Presumably, these "vulture capitalists" could only afford to make such a bet, because they had historically succeeded more often than they failed. If you're going to deride Bain/KKR as being bad for the economy, because of this failure, you should also have the intellectual consistency to compliment them for their successes in previous leveraged buyouts.
90% of new businesses fail - most often from not finding or matching/addressing the market. The market also changes so anyone who doesn't adapt end on the Darwinian company list.
That is not to say that Bain, TPG, etc aren't objectively evil.
https://en.wikipedia.org/wiki/Price-based_selling#Price-matc...
Plus, you’re less likely to get counterfeit product, and at Christmas you lose the risk of fulfillment fubar.