Toys R Us is planning for the potential liquidation of its operations in the USA, according to a report by Bloomberg.
In the US and Canada, the toy retailer has been under bankruptcy protection, while its wholly-owned UK subsidiary is in administration and running closing-down sales in all of its stores.
In late January, 182 stores were listed in US court documents as proposed locations that would be shut down. Some of these stores were reportedly spared closure, however, news appeared later that the owners intended to shut down a further 200 hundred stores.
A rescue deal for the company is still being sought, however, the possibility of liquidation has been previously rumoured.
Toys R Us was bought in 2005 by a venture capital consortium consisting of KKR, Bain Capital, and Vornado Realty Trust via a leveraged buyout (LBO). This meant that a significant part of the purchase price was obtained through borrowing which Toys R Us was burdened with. The motive of such venture capital deals – or private equity deals as they are known in the UK – is to sell on the business at a profit within a few years.
An Initial Public Offering (IPO) had been planned for around 2010, however, the company’s poor sales performance meant that a flotation never happened nor did a private buyer emerge.
Toys R Us has been in the hands of its current owners for far longer than any private equity owner would ever intentionally hold on to. With the company struggling to keep up with the debt repayments it was burdened with and no other potential buyer of the company in sight, the ultimate demise of the business seems to be almost inevitable.
Its current owners are unlikely to suffer too much if Toys R Us does become history as bondholders will be the investors that see their money lost. The venture capital owners themselves will have over the years have drawn money out of Toys R Us via various management fees.
Bain Capital previously owned rival toy store chain KB Toys from 2000. After just four years of ownership by Bain Capital, KB Toys (whose origins date back to the 1920s as a wholesaler of sweets) entered into chapter 11 bankruptcy protection
Control of KB Toys was lost by Bain Capital and although the company emerged from chapter 11, five years later KB Toys was liquidated. Bain’s few years of influence on KB Toys has been cited as a major reason for the Pittsburgh company’s decline.