Liquidations in bankruptcy for companies of any size, and particularly ones with brand names and customer loyalty, are rare, and for good reason. A franchise usually has more value than the assets, meaning the inventory, equipment, and even trying to sell the trademark and any other intellectual property separate from a venture. This was almost certainly the case with Toys R’ Us, a well-loved retailer that had arguably soldiered on far longer than one might have expected, given the insane amount of debt put on its books at the time of its acquisition by funds managed by Bain Capital, KKR, and Vornado and then years of underinvestment. From a June post:
But why would the death of Toy ‘R’ Us be different than any of a myriad of other private-equity-induced business failures? One reason is that the overleveraging of the retailer was more directly responsible for its collapse than in other company deaths. Another was that the media, and more important, Congresscritters took interest.
Recall that Toys ‘R’ Us filed for bankruptcy last September and shuttered one-fifth of its stores in January in an effort to keep the chain going. In March, the company threw in the towel, announcing it was liquidating its US operations, which destroyed 33,000 jobs.
The fact that Toy ‘R’ Us is stiffing workers on severance, after petitioning the bankruptcy court in September to pay executives $20 million in incentive bonuses, was too obvious a case of looting to ignore. A story in The Week, How vulture capitalists ate Toys ‘R’ Us, recapped the slow strangulation under too much debt, after Bain, KKR, and Vornado bought the company in 2004 for $6 billion, with only $1.2 billion of that in equity:
Whatever magic Bain, KKR, and Vornado were supposed to work never materialized. From the purchase in 2004 through 2016, the company’s sales never rose much above $11 billion. They actually fell from $13.5 billion in 2013 back to $11.5 billion in 2017.
On its own, that shouldn’t have been catastrophic. The problem was the massive financial albatross the leveraged buyout left around Toys ‘R’ Us’ neck. Just before the buyout, the company had $2.2 billion in cash and cash-equivalents. By 2017, its stockpile had shriveled to $301 million, even as its debt burden ballooned from $2.3 billion to $5.2 billion. Meanwhile, Toys ‘R’ Us was paying $425 million to $517 million in interest every year.
This enormous cash drain probably made it impossible for the company to invest or innovate even if its trio of buyers had been up to the challenge. It also made it impossible to sustainably turn a profit. Toys ‘R’ Us consistently saw net losses from 2014 to 2017. But in the last three years, those net losses were considerably smaller than its debt payments. In fact, the losses were shrinking amidst a general boom in toy industry sales; by 2017, its losses were all the way down to $36 million.
In other words, if Bain, KKR, and Vornado had never come along, Toys ‘R’ Us wouldn’t be doing stellar, but it probably could’ve muddled through. As recently as last year, the company still accounted for 20 percent of all U.S. toy sales.
The Week states, with no citations, that the three partners took out $200 million in fees. If anything, that figure is light.
Back to the current post. In other words, Toys ‘R’ Us, even in its diminished state, was a real force, and its overwhelming problem was its debt burden, and that would be restructured in a bankruptcy.
So it was bizarre, as well as distressing, to see the Toys R’ Us creditors saying they were going to put everything up for sale and shutter the chain’s doors in the US.
That changed because the creditors, who now own the bankrupt estate, apparently found out the hard way that liquidation wasn’t such a bright idea. They canceled an auction for the intellectual property assets, apparently having figured out the bids were going to be lower than they’d expected.
Toys R Us isn’t dead yet.
The bankrupt retailer, which in March announced that it would close more than 800 stores around the U.S., filed paperwork with a Virginia bankruptcy court on Monday indicating that it will cancel the auction of its intellectual-property assets and instead pursue new business under the Toys R Us and Babies R Us brand names.
The move doesn’t appear to be motivated by a lack of interest from outside parties: The lender group that controls the assets said that it had received qualified bids but that none were “reasonably likely to yield a superior alternative” to its own plan to revive the brand names, keep up the existing license agreements and invest in new retail operations.
The new branding company will be run by the group of private equity funds that financed the Toys R Us bankruptcy and liquidation, a group separate from the private equity firms that bought the toy retailer for $6.6 billion in a leveraged buyout in 2005. The bankruptcy lenders have been criticized for not supporting severance payments for the more than 30,000 Americans who lost their jobs in the bankruptcy.
If Toys R Us begins to open new locations (or move back in to old ones), it will be among the more dramatic retail comebacks in recent years, though far from the only one. Several retailers have gone bankrupt and stayed in business, whether through restructuring (like Payless ShoeSource), additional investment (The Walking Co.) or selling their assets to an outside party through a 363 sale (Nine West). Even bankrupt Bon-Ton, which this spring announced plans to shutter 200 stores, putting 24,000 employees out of work, is reopening some locations, thanks to new ownership (though the company’s priority appears to be e-commerce).
A press release has a bit more detail on the revival plans:
Geoffrey, LLC, Toys “R” Us, Inc.’s intellectual property holding company subsidiary, announced today that it is moving forward with a plan for substantially all of its assets to be acquired by a group of investors led by Geoffrey, LLC’s existing secured lenders….
Geoffrey, LLC, as reorganized, will control a portfolio of intellectual property that includes trademarks, ecommerce assets and data associated with the Toys “R” Us and Babies “R” Us businesses in the United States and all over the world, including a portfolio of over 20 well-known toy and baby brands such as Imaginarium, Koala Baby, Fastlane and Journey Girls. The reorganized company will own rights to the Toys “R” Us and Babies “R” Us brands in all markets globally, with the exception of Canada. It will also become the licensor of the brands to the company’s existing network of franchisees operating in countries across Asia, Europe and the Middle East, and in South Africa.
In addition to continuing to service these markets, the new owners are actively working with potential partners to develop ideas for new Toys “R” Us and Babies “R” Us stores in the United States and abroad that could bring back these iconic brands in a new and re-imagined way. Geoffrey LLC will provide additional detail on this front as it becomes available.
Although this is welcome news, I wouldn’t pop the champagne.
First, the 33,000 Toys ‘R’ Us workers have had to find new sources of income, so the resurrection of the chain is unlikely to help the overwhelming majority of them. Second, the creditor group clearly preferred a quick flip of the intellectual property assets to working on the business of the business. Rebuilding Toys ‘R’ Us was not their preferred option, so query how good a job they will do.
Nevertheless, bringing Toys ‘R’ Us back to life is a plus for workers and communities. Let’s hope these reluctant fix-up artists prove to be up to the task.
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I finally understand that Toys R Us was another victim of the old leveraged buyout trick. If the liberals were worth a damn, they would have gone after LBOs when they had a chance. But, of course, they’re in on the scam and never would do anything to hurt the ruling class.
One of the local Toys-R-Us stores in my area already shut down, liquidated all the merchandise and the building was sold or at least leased out to another business (some seasonal Halloween/Christmas store.)
So this has a bit of a “ready, fire, aim!” feel to it.
This is so much of what’s wrong in our country:
and
An obvious case of stealing from the poor to give to the rich and the result is…criticism. If that’s the collective response to overt exploitation, it’s no wonder we get exploited so much…just sayin’.
Willard:
“I don’t want to grow up, i’m a Ploys ‘R Us kid, rip a company apart vis a vis a private equity gig.”
The Toys ‘R’ Us/Babies ‘R’ Us that shuttered near me sat in a shopping complex that also has a Best Buy, another brick and mortar chain that had more than few premature obituaries written about it, stating that the Amazons of the world spelled its death knell. Yet, Best Buy chugs on. Part of that is that they stepped up their online retail game, but most of it comes from the fact that they started emphasizing their tech support and install services, something Amazon can’t really do.
So if the Toys ‘R’ Us/Babies ‘R’ Us brand wants to revive, they need to find similar services to offer that Amazon cannot. On the Babies side, that could mean lamaze/birthing/baby 101 classes, daycare, mommy/daddy and me activity and play groups. On the Toys side, that could mean party space/planning rentals, put in video game arcade sections, host e-sports tournaments. Make them plays where you go for services and events, not just buying plastic junk.
How about offering free in-store assembly on all those toy contraptions that come in boxes that say “some assembly required?” How many otherwise wonderful Christmas mornings have been ruined for parents by those three little words? Thanks to the author of this article for putting the Toys R Us story into context (however infuriating) and for providing a bit of optimism (however cautious). God how we’re dying out here for good news.
No such things as ‘free’.
It’ll be too late for my town. The Toys R Us has been turned into–what else?–a Halloween store.
Very sturdy built 1960’s former banks are used for Halloween stores around these parts, as they are generally useless for anything else, and 1/12th of the year, they’re really hopping, but the other 11/12’s, not so much.
One was finally taken down on the main drag about 6 months ago, and I was talking to somebody involved in the deconstruction, and he told me, it’s amazing how well built it was, and he thought it took 5x as long to pull down, as a conventional building.
Och, banks and their closures. There was a branch of mine on the corner just up the road from where I live. It was absolutely always busy with customers who used both the machines and the services offered by the people who worked inside. There are lots of elderly people and immigrants in my neighbourhood and therefore many who continue using cash for their shopping as well as those who prefer/require personal assistance when doing their banking transactions rather than the maddening touchscreens on the machines.
At the beginning of the year, the branch closed without warning and in its place there remains a single cash machine at the other end of the long street. At the beginnings of the month you have to queue up to 45 minutes just to withdraw cash from that machine as the entire area is forced to use it. Since closing, the branch has been disused and the interior of the building is falling steadily into disrepair.
Meanwhile, of course, banks are producing a stream of propaganda for the brave new world of cashless life they are determined to impose whether the world wants it or not – abetted, it must be said, by governments with their platitudes about fraud and criminality (not sure whether or not they believe such soft soap – perhaps a bit of both). Where I live, in fact, the government was preparing to drastically reduce the maximum amount of cash you could use for any given payment but the intense unpopularity of such a measure forced them into temporary retreat. They are otherwise completely deaf to arguments made about the erosion of privacy, reckless empowerment of banks and inevitable potential for completely needless costs to be introduced.
It’s hardly a new observation but things like this underline just how far governments have detached themselves from any notion that they exist to design policies or shape directions that express the desires, demands and hopes of their citizens while protecting them from the depredations of other powerful social forces. It is all so familiar and yet there are occasions when it appears once more in the stark light of surprise or novelty and you get to appreciate again just how perverse it is for governments to operate on behalf of narrow sectional interests or to consciously prevent changes that are demanded by clear majorities of the population (e.g. public ownership of railways in the UK, socialised healthcare in the US). Even worse is the fact that with a handful of exceptions like the Labour Party under Jeremy Corbyn, there are virtually no mainstream political parties willing to form a policy settlement on the basis of what people want rather than the things they’re told to do by whichever interests have attained enough economic might to seize their attention.
That deal is generally a short term rental. The owner of the store wants revenue.
I agree with Darius above. Leveraged buyouts ought to be either severely restricted or banned outright. At the very least, the vulture capital firms should be the ones charged with paying back the loans — not the company they invade.
Agreed that LBO should be severely restricted, but alongside that there is surely also scope for reformulating the criteria by which creditors are privileged when companies go into administration – not being blessed with professional or academic training in the world of modern capitalism or finance, I’m sure others will know much more than me about this, but thinking about recent high profile UK bankruptcies – British Home Stores (owned by the execrable ‘Sir’ Philip Green), House of Fraser (bought from administration by Sports Direct owner Mike Ashley), and Carillion – I was struck in each case by how the people most exposed to the bankruptcies were current or former employees (pension funds ultimately bailed out by the Pensions Protection Fund), customers with orders not yet fulfilled, and other companies that form part of the supply chain and who have unpaid bills/contracts. As a non-expert, it seems as if the secured creditors and the unsecured creditors have been inverted, with all the risk transferred off the shoulders of those who should be professionally involved in its managements and onto those of the people/companies least responsible for the company collapse as well as almost invariably worst able to withstand the fallout of getting mere pennies on the pound.
Furthermore, if financial institutions and certain investors are completely secure and essentially risk-free, alongside the excessively remunerated executives they place at the top of the companies they take over, it seems to me as if you’ve created a situation guaranteed to produce too much risk, too much debt, wanton asset-stripping, short-term thinking, and an excessively volatile churn of investment, buy-out, ownership handover, and ultimately corrupt or corrupting relationships between arms-length investors as they pass assets from hand to hand while siphoning off whatever they can and never, ever bothering to plan into the medium term since they know from the outset their period of ownership won’t last that long.
Going back to the UK examples, what HofF and BHS had in common was a churn of ownership and predatory investors (Phillip Green became infamous) interested only in massaging the quarterly books sufficient to ensure their dividends – no different, in essence, from the behaviour of junk bond raiders like Milkin and Goldsmith in the 1980s, which I guess isn’t surprising since they wrote the template on how to leverage buyouts in order to asset-strip corporations, especially ones with a history and therefore plenty of intellectual property and bricks-and-mortar assets like prime-location properties. The fact that their collapses were suffered primarily by their workers, ex workers and small businesses providing services rather than institutional investors, financiers, insurers or other secured creditors, seems to me emblematic of how capitalism has been turned on its head – but perhaps some here with greater in-depth knowledge will be able to correct me!
Watching the for & against media spins about who was the real victim in bankrupting the business (Bloomberg ran a story on March 9th saying the LBO investors were the losers) seems to be slowly tipping the other way. It seems the bad press about sticking it to workers made it to Congress and the hard work done by a retail worker organization has caused the PE boys who broke the company to come up with some cash for the 33,000 employees. https://www.wsj.com/articles/toys-r-us-owners-to-create-severance-fund-for-former-employees-1538170602
Of course their initial offer of a pool of $20 million (about $600 bucks per worker) is BS and is well below the severance levels the employees should have received given their years of service, particularly given the payouts the “brilliant execs” received.
It’s extraordinarily easy to blame the LBOs but the facts are Geoffrey, LLC entered into the agreement with their eyes wide open. After all, it’s not like it’s news to anybody what LBOs do and how they operate. As always with a contract, both parties had hopes for a good resolution . . . but sometimes deals just don’t work. However, it’s my view painting LBOs as bad guys, as vultures, is faulty because it only offers up one side of the story without examining the other side of the coin, the success stories, or put another way – like real vultures – they play a valuable role, e.g. do a useful job of cleaning up the road kill. Does anyone seriously believe the company wasn’t on the way to becoming road kill? If not, why did they partner up in the first place? For those wearing rose colored glasses, or just not up to speed regarding leveraged buyouts, here’s a primer: https://www.investopedia.com/terms/l/leveragedbuyout.asp
“Everyday is trick or Treat.” Bain as Mitt Romney’s source of wealth to blame for the hurt of people stuck working for a living and all that gets to me.
Government fines of fraud banks & their bankers go into the shredder. They ought be treated as class action suits resulting in those being harmed receiving checks, their pensions. I’m thinking same for these bad faith acts of business men, and women.
“There is something wrong with this country.” is a common sort of saying. It is the rupture of any responsibility towards labor of those who have the means to play mobster financial engineering games that is wrong.
Meyer Lansky is the primary influence on business people, finance, of our era.
So we know really what is wrong.
Yesterday I read Eric Holder is going to have a TV show about an Attorney General going after white collar criminals. What a hoot.
I estimate that it is a good time to be a grip or electric in LA, & maybe even NYC. Distribution on line is exploding far as I can tell, hearing of all these shows we don’t get on our TV.
Panavision just sold.
However I have seen reports that the IATSE members are not making much. SAG-AFTRA is expanding into representation for more musicians.
Creative accounting was invented in LA by Hollywood according to what I’ve read.
Toys are Us offered an experience that Amazon could not match. Walking into their stores was a magical experience for children, where toys could be examined up close and touched. The destruction of this great franchise by profiteering LBO criminals should never have been allowed. This kind of behavior needs to be made illegal asap.