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To those saying Toys R Us was doomed because of toys going digital or anything like that: not so fast. > A year later the company was taken private by KKR, Bai

by untog 9y ago

To those saying Toys R Us was doomed because of toys going digital or anything like that: not so fast. > A year later the company was taken private by KKR, Bain Capital and real estate firm Vornado. The $6.6 billion purchase left it with $5.3 billion in debt secured by its assets and it never really recovered. http://money.cnn.com/2018/03/15/news/companies/toys-r-us-closing-blame/index.html http://money.cnn.com/2018/03/15/news/companies/toys-r-us-clo... Maybe the physicial toys business is totally screwed, but this isn't evidence of that. It's evidence of a company being loaded down with debt and drowning under it.

pjc50 9y ago
Ah, the smoking gun. This is what happened to Maplin as well. In both cases the underlying business might be failing, but this kind of debt-encumbering buyout purchase usually results in a transfer of money from both what's left in the business and also the (bank) creditors to the capital firms.
- abricot 9y ago
  So, is taking it private a way to avoid scrutiny while they bleed the company dry? Or am I completely wrong?
  - uhhhhhhh 9y ago
    It can be. That doesn't mean it is. Going private allows a company to focus less on shareholder value (its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way, which is rarer than it should be). That theoretically allows it to focus on growth or market entrenchment before profits, and take risks otherwise you wouldn't be able to take without risks of lawsuits. It allows more freedom in restructuring and financial business decisions. The downside to that is when a vulture capitals like Bain or Ichan comes along, their motives are to extract as much profit from the 'asset' as possible for themselves regardless of the outcome to the business. It stands in start contrast to venture capital firms that actually care about success. its usually obvious which one 'investors' are. If they're willing to put up money and take risks with you at the start, they're venture. If they're coming along after you're successful but struggling with a 'grand plan' to restructure and improve your business if you accept their money (and hand over way more control than you should), they're vulture. All of that is just my observations of course. I'm open to counter arguments.
    - abricot 9y ago
      Thank you for the explanation.
    - acdha 9y ago
      > its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way This is widely claimed but there is no such requirement: https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-value-myth/ https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v... The reason is obvious: it’s hard to predict over any non-trivial time in the future, so there’s a broad deference to business judgement. In the case of Toys-R-Us, for example, if they’d been a public company at the time that argument could simply be that lower returns to shareholders now was critical to the long-term health of the business. People who disagreed could sell their shares or attempt to find enough like minded shareholders to replace the leadership but nobody could say their view is unambiguously correct and so the law stays out of it.
    - bko 9y ago
      I don’t understand you’re hostility to what you call vulture capitals. If the assets of a company are worth more than the business as a going concern, shouldn’t the assets be liquidated or repurposed for more effective purposes?
      - TeMPOraL 9y ago
        Is lining up pockets of third-parties a "more effective purpose"? Also, it seems to me that your computer could be used more effectively if it was a part of my scientific computing platform. Can I take it now?
        bko 9y ago
        You can buy it from me, which is what venture capitalists do. You can buy it from me and use it as collateral against a loan provided by a bank. I don’t see anything wrong with this.
        9y ago
  - jjoonathan 9y ago
    It's the white collar version of walking out with chairs and the coffee machine -- so, naturally, 1000x more damaging and 1000x less illegal.
    - typon 9y ago
      Great analogy
  - ataturk 9y ago
    Yes! I have watched this over and over again and marveled at how effective these corporate raiders are. There are some unbelievably greedy people out there.
ars 9y ago
What I'd like to know is did those firms make money (by leaving the lender holding the bag) or did they lose money (the money they spent to buy the company)? Sears also seems to be headed down the same path, and I have the same question there.
simonh 9y ago
So how does this work out for KKR, Bain Capital and Vornado? Surely if the business goes bust, they're left saddled with the debt?
- tyu100 9y ago
  They usually do well for two reasons. First, the debt is on the books of the company they take over, not the private equity firm. Second, once they have control of the company they charge it 'management fees' for the executives and consultants they assign to run the firm.
  - acdha 9y ago
    They’re also free to loot assets: e.g. one popular technique is to transfer things like real estate and then have the former owner rent its stores back. At the end, they have that property to sell with none of the obligations.
- eric_b 9y ago
  Oh I wouldn't count on that. I'm not sure in this case, but PE usually has a way to "win" even if the company does not. https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/ https://foragerfunds.com/bristlemouth/dick-smith-is-the-grea...
- ataturk 9y ago
  Uh, what? Hell, no! The debt belongs to the TRU entity. The creditors will get pennies on the dollar. They're getting ripped off. If you really want to see some fuckery, go look at what Wells Fargo did with their portfolio of bad HELOCs. Here's a hint: They spun off a new company that "bought" those "assets" which showed a profit for WF. The new corporate vehicle took all the pain away for them. I haven't been able to follow what happened after that, but probably something like all the bad debt is either still sitting out there in this other corporation or maybe it's been wound down by now with all the losses swept under the rug. We're talking billions here.
tyu100 9y ago
Yes, another disastrous private equity takeover. Debt servicing and management fees to the private equity funds take so much money out of the company that there is little left for innovation or tactical missteps. Sometimes you will see that private equity only comes in when the company is in trouble anyway but I don't think Toys 'R Us was in the bad of shape when Bain and KKR showed up.
- colechristensen 9y ago
  I was under the impression that the "disaster" was entirely intentional and for profit.
poster123 9y ago
I wonder if the capital structure of a business determines whether it continues to operate. If the debt-holders thought they could maximize value by keep the stores open, they would. Instead they have decided that liquidation maximizes value. If there were no debt, equity holders might still decide that being bought out by a company that could better use the buildings would maximize value.
fredley 9y ago
In Fargo season three [mild spoilers] they portray this kind of hostile takeover, albeit rather more dramatically. It's a big twist at the end of the story (for those not already aware) when it turns out what the villains were doing in this regard was not actually illegal, if done properly.
toast0 9y ago
Toys R Us wasn't doing so well before the leveraged buy out either. Declining retail firms seem to turn to leveraged buyouts as a way to gain capital to give it one last big push, and then wind down in 5-10 years. Without the buyout, they would probably slowly dwindle over 20 years.
msie 9y ago
Bain Capital strikes again!

by untog 9y ago

pjc50 9y ago

Ah, the smoking gun. This is what happened to Maplin as well. In both cases the underlying business might be failing, but this kind of debt-encumbering buyout purchase usually results in a transfer of money from both what's left in the business and also the (bank) creditors to the capital firms.

abricot 9y ago
So, is taking it private a way to avoid scrutiny while they bleed the company dry? Or am I completely wrong?
- uhhhhhhh 9y ago
  It can be. That doesn't mean it is. Going private allows a company to focus less on shareholder value (its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way, which is rarer than it should be). That theoretically allows it to focus on growth or market entrenchment before profits, and take risks otherwise you wouldn't be able to take without risks of lawsuits. It allows more freedom in restructuring and financial business decisions. The downside to that is when a vulture capitals like Bain or Ichan comes along, their motives are to extract as much profit from the 'asset' as possible for themselves regardless of the outcome to the business. It stands in start contrast to venture capital firms that actually care about success. its usually obvious which one 'investors' are. If they're willing to put up money and take risks with you at the start, they're venture. If they're coming along after you're successful but struggling with a 'grand plan' to restructure and improve your business if you accept their money (and hand over way more control than you should), they're vulture. All of that is just my observations of course. I'm open to counter arguments.
  - abricot 9y ago
    Thank you for the explanation.
  - acdha 9y ago
    > its legal first obligation as a traded company save for a legally defendable company charter that counters this in any way This is widely claimed but there is no such requirement: https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-value-myth/ https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v... The reason is obvious: it’s hard to predict over any non-trivial time in the future, so there’s a broad deference to business judgement. In the case of Toys-R-Us, for example, if they’d been a public company at the time that argument could simply be that lower returns to shareholders now was critical to the long-term health of the business. People who disagreed could sell their shares or attempt to find enough like minded shareholders to replace the leadership but nobody could say their view is unambiguously correct and so the law stays out of it.
  - bko 9y ago
    I don’t understand you’re hostility to what you call vulture capitals. If the assets of a company are worth more than the business as a going concern, shouldn’t the assets be liquidated or repurposed for more effective purposes?
    - TeMPOraL 9y ago
      Is lining up pockets of third-parties a "more effective purpose"? Also, it seems to me that your computer could be used more effectively if it was a part of my scientific computing platform. Can I take it now?
      - bko 9y ago
        You can buy it from me, which is what venture capitalists do. You can buy it from me and use it as collateral against a loan provided by a bank. I don’t see anything wrong with this.
        9y ago
- jjoonathan 9y ago
  It's the white collar version of walking out with chairs and the coffee machine -- so, naturally, 1000x more damaging and 1000x less illegal.
  - typon 9y ago
    Great analogy
- ataturk 9y ago
  Yes! I have watched this over and over again and marveled at how effective these corporate raiders are. There are some unbelievably greedy people out there.

ars 9y ago

What I'd like to know is did those firms make money (by leaving the lender holding the bag) or did they lose money (the money they spent to buy the company)? Sears also seems to be headed down the same path, and I have the same question there.

simonh 9y ago

So how does this work out for KKR, Bain Capital and Vornado? Surely if the business goes bust, they're left saddled with the debt?

tyu100 9y ago
They usually do well for two reasons. First, the debt is on the books of the company they take over, not the private equity firm. Second, once they have control of the company they charge it 'management fees' for the executives and consultants they assign to run the firm.
- acdha 9y ago
  They’re also free to loot assets: e.g. one popular technique is to transfer things like real estate and then have the former owner rent its stores back. At the end, they have that property to sell with none of the obligations.
eric_b 9y ago
Oh I wouldn't count on that. I'm not sure in this case, but PE usually has a way to "win" even if the company does not. https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/ https://foragerfunds.com/bristlemouth/dick-smith-is-the-grea...
ataturk 9y ago
Uh, what? Hell, no! The debt belongs to the TRU entity. The creditors will get pennies on the dollar. They're getting ripped off. If you really want to see some fuckery, go look at what Wells Fargo did with their portfolio of bad HELOCs. Here's a hint: They spun off a new company that "bought" those "assets" which showed a profit for WF. The new corporate vehicle took all the pain away for them. I haven't been able to follow what happened after that, but probably something like all the bad debt is either still sitting out there in this other corporation or maybe it's been wound down by now with all the losses swept under the rug. We're talking billions here.

tyu100 9y ago

Yes, another disastrous private equity takeover. Debt servicing and management fees to the private equity funds take so much money out of the company that there is little left for innovation or tactical missteps. Sometimes you will see that private equity only comes in when the company is in trouble anyway but I don't think Toys 'R Us was in the bad of shape when Bain and KKR showed up.

colechristensen 9y ago
I was under the impression that the "disaster" was entirely intentional and for profit.

poster123 9y ago

I wonder if the capital structure of a business determines whether it continues to operate. If the debt-holders thought they could maximize value by keep the stores open, they would. Instead they have decided that liquidation maximizes value. If there were no debt, equity holders might still decide that being bought out by a company that could better use the buildings would maximize value.

fredley 9y ago

In Fargo season three [mild spoilers] they portray this kind of hostile takeover, albeit rather more dramatically. It's a big twist at the end of the story (for those not already aware) when it turns out what the villains were doing in this regard was not actually illegal, if done properly.

toast0 9y ago

Toys R Us wasn't doing so well before the leveraged buy out either. Declining retail firms seem to turn to leveraged buyouts as a way to gain capital to give it one last big push, and then wind down in 5-10 years. Without the buyout, they would probably slowly dwindle over 20 years.

msie 9y ago

Bain Capital strikes again!