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TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. 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-it-may-leave-the-toy-business.html https://www.nytimes.com/2004/08/12/business/toys-r-us-says-i... https://www.nytimes.com/2005/03/18/business/company-news-toys-r-us-accepts-66-billion-buyout.html https://www.nytimes.com/2005/03/18/business/company-news-toy...

InclinedPlane 9y ago
Huh? 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.
- JumpCrisscross 9y ago
  > 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. 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.
  - metabagel 9y ago
    They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.
    - justherefortart 9y ago
      Exactly, where'd that 5 billion in loans go? Poof!
      - metabagel 9y ago
        The bulk of that was not KKR or Bain's money. They were loans that Toys 'R' Us took on as part of the LBO.
      - JumpCrisscross 9y ago
        > where'd that 5 billion in loans go? 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.
    - JumpCrisscross 9y ago
      > Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us 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-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
- dkural 9y ago
  Yes, it used it's own money - the buyout companies came up with 20% of the purchase price (think of the 20% like a downpayment on a house; they borrowed the other 80%; like getting a mortgage). They lost a lot of $. They couldn't "flip" it and resell / IPO the company in this case, hence no profit.
toss1 9y ago
Agree they "Vultures" were the suckers in this case. 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.
- deleted 9y ago
  [deleted]
- benmmurphy 9y ago
  the article doesn't go into much detail about what the management fees were for or how much of the fee would be profit to the LBO group. its entirely possible that the LBO groups have a management staff on hand they parachute into their investments and this fee pays their wages and there is nothing much else left over.
  - toss1 9y ago
    >"doesn't go into much detail" -- the article specifically stated that they totaled $200m in fees. The author was specifically trying to find and account for those fees. If there were more, the author would have included it as more fees supported his point better. 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?
rayiner 9y ago
Yeah, seriously, the author is nuts. I've got a 5-year old and I can't remember the last time I've been to Toys R Us. She knows how to pick stuff out on Amazon; for trinkets there's Target, and a lot of her "toys" now are on her iPad/digital. Suburban big-box retail stores aren't a growth area, and toy stores selling Chinese-made junk are probably among the worst situated. Unlike, e.g. clothes or food, there is little value in being able to look at the thing before you buy (the kid probably wants it because its branded so it doesn't matter whether the actual toy is crap or not).
- jimmaswell 9y ago
  A problem is that in a retail store, you might walk by something new and want to try it. On Amazon et al you're largely going to stick with what you know, and the site's recommendations are probably not going to stray much. 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.
  - ISV_Damocles 9y ago
    What you've described doesn't sound like a value-add at all to me. In stores they can manipulate your senses to get you to make emotion-based purchases whether or not it makes economic sense or if you're going to actually get your money's worth out of the product. 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.
    - jjeaff 9y ago
      >that detachment helps you keep a more level head while purchasing 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.
refurb 9y ago
Exactly. Everyone craps all over LBO deals and complains when the funds earn huge payouts. Well, they earn huge payouts because of the risk involved, which is plainly clear in this case.
metabagel 9y ago
I think you may have missed the part where Toys 'R' Us' debt skyrocketed from $109M to $5B due to the leveraged buyout. The interest on that debt as well as the exorbitant management fees did Toys 'R' Us in. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us-downfall-is-ominous-reminder-about-debt-laden-deals https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...
- gvhst 9y ago
  While I agree with you with respect to the over-leveraging of the business, management fees are charged to the LPs (Investors) of the fund and not portfolio companies.
  - metabagel 9y ago
    Thanks. I stand corrected. :-)
- JumpCrisscross 9y ago
  > the exorbitant management fees 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-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#785c558c73b0 https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...
  - metabagel 9y ago
    Sorry, advisory fees. We don't know how much they siphoned out of Toys 'R' Us over the last twelve years, and without that information it's premature to say that they lost money on the deal.
poof131 9y ago
Why do I doubt they are the real losers here? Bloomberg states that they pocketed over $470M in fees.[1] And I imagine they were able to write off losses against wins elsewhere. So the real losers still seem to be the employees and the American people. A few years back I was talking to an east coast banker turned VC and he was pooping on the leveraged buyout industry. He said that all the debt payments are tax deductible, so you take a cash flow positive company, saddle it with debt, and essentially stop paying taxes to the government and turn that into payouts for the investors.[2] He said if you look at other countries with different tax policies in regards to debt, you don’t find the same scale of the industry. Perhaps with a better tax policy we could have seen a more natural outcome for Toys ‘R’ Us? I assume unfortunately that the limit on deductions in the second linked article never made it into law and went the way of closing the carried interest loophole.[3] [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-... [2] https://www.reuters.com/article/us-usa-tax-privateequity/u-s-tax-curbs-on-debt-deduction-to-sting-buyout-barons-idUSKBN1EF1G5 https://www.reuters.com/article/us-usa-tax-privateequity/u-s... [3] https://www.thedailybeast.com/republicans-love-welfarefor-the-rich-its-called-the-carried-interest-loophole https://www.thedailybeast.com/republicans-love-welfarefor-th...
- JumpCrisscross 9y ago
  > Bloomberg states that they pocketed over $470M in fees 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.
  - sangnoir 9y ago
    > 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.
- icelancer 9y ago
emodendroket 9y ago
I'd say the bigger suckers are all the people losing their jobs.

InclinedPlane 9y ago

Huh? 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.

JumpCrisscross 9y ago
> 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. 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.
- metabagel 9y ago
  They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.
  - justherefortart 9y ago
    Exactly, where'd that 5 billion in loans go? Poof!
    - metabagel 9y ago
      The bulk of that was not KKR or Bain's money. They were loans that Toys 'R' Us took on as part of the LBO.
    - JumpCrisscross 9y ago
      > where'd that 5 billion in loans go? 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.
  - JumpCrisscross 9y ago
    > Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us 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-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
dkural 9y ago
Yes, it used it's own money - the buyout companies came up with 20% of the purchase price (think of the 20% like a downpayment on a house; they borrowed the other 80%; like getting a mortgage). They lost a lot of $. They couldn't "flip" it and resell / IPO the company in this case, hence no profit.

toss1 9y ago

Agree they "Vultures" were the suckers in this case. 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.

deleted 9y ago
[deleted]
benmmurphy 9y ago
the article doesn't go into much detail about what the management fees were for or how much of the fee would be profit to the LBO group. its entirely possible that the LBO groups have a management staff on hand they parachute into their investments and this fee pays their wages and there is nothing much else left over.
- toss1 9y ago
  >"doesn't go into much detail" -- the article specifically stated that they totaled $200m in fees. The author was specifically trying to find and account for those fees. If there were more, the author would have included it as more fees supported his point better. 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?

rayiner 9y ago

Yeah, seriously, the author is nuts. I've got a 5-year old and I can't remember the last time I've been to Toys R Us. She knows how to pick stuff out on Amazon; for trinkets there's Target, and a lot of her "toys" now are on her iPad/digital. Suburban big-box retail stores aren't a growth area, and toy stores selling Chinese-made junk are probably among the worst situated. Unlike, e.g. clothes or food, there is little value in being able to look at the thing before you buy (the kid probably wants it because its branded so it doesn't matter whether the actual toy is crap or not).

jimmaswell 9y ago
A problem is that in a retail store, you might walk by something new and want to try it. On Amazon et al you're largely going to stick with what you know, and the site's recommendations are probably not going to stray much. 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.
- ISV_Damocles 9y ago
  What you've described doesn't sound like a value-add at all to me. In stores they can manipulate your senses to get you to make emotion-based purchases whether or not it makes economic sense or if you're going to actually get your money's worth out of the product. 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.
  - jjeaff 9y ago
    >that detachment helps you keep a more level head while purchasing 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.

refurb 9y ago

Exactly. Everyone craps all over LBO deals and complains when the funds earn huge payouts. Well, they earn huge payouts because of the risk involved, which is plainly clear in this case.

metabagel 9y ago

I think you may have missed the part where Toys 'R' Us' debt skyrocketed from $109M to $5B due to the leveraged buyout. The interest on that debt as well as the exorbitant management fees did Toys 'R' Us in. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us-downfall-is-ominous-reminder-about-debt-laden-deals https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...

gvhst 9y ago
While I agree with you with respect to the over-leveraging of the business, management fees are charged to the LPs (Investors) of the fund and not portfolio companies.
- metabagel 9y ago
  Thanks. I stand corrected. :-)
JumpCrisscross 9y ago
> the exorbitant management fees 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-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#785c558c73b0 https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...
- metabagel 9y ago
  Sorry, advisory fees. We don't know how much they siphoned out of Toys 'R' Us over the last twelve years, and without that information it's premature to say that they lost money on the deal.

poof131 9y ago

Why do I doubt they are the real losers here? Bloomberg states that they pocketed over $470M in fees.[1] And I imagine they were able to write off losses against wins elsewhere. So the real losers still seem to be the employees and the American people. A few years back I was talking to an east coast banker turned VC and he was pooping on the leveraged buyout industry. He said that all the debt payments are tax deductible, so you take a cash flow positive company, saddle it with debt, and essentially stop paying taxes to the government and turn that into payouts for the investors.[2] He said if you look at other countries with different tax policies in regards to debt, you don’t find the same scale of the industry. Perhaps with a better tax policy we could have seen a more natural outcome for Toys ‘R’ Us? I assume unfortunately that the limit on deductions in the second linked article never made it into law and went the way of closing the carried interest loophole.[3] [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-... [2] https://www.reuters.com/article/us-usa-tax-privateequity/u-s-tax-curbs-on-debt-deduction-to-sting-buyout-barons-idUSKBN1EF1G5 https://www.reuters.com/article/us-usa-tax-privateequity/u-s... [3] https://www.thedailybeast.com/republicans-love-welfarefor-the-rich-its-called-the-carried-interest-loophole https://www.thedailybeast.com/republicans-love-welfarefor-th...

JumpCrisscross 9y ago
> Bloomberg states that they pocketed over $470M in fees 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.
- sangnoir 9y ago
  > 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.
icelancer 9y ago

emodendroket 9y ago

I'd say the bigger suckers are all the people losing their jobs.