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.