Toys 'R' Us avoids breakup with deal
Associated PressA consortium of investors will take over the toy seller and its lucrative baby subsidiary.
Published March 18, 2005
NEWARK, N.J. - Toys "R" Us Inc., the nation's second-largest toy seller, is staying in one piece after weighing a breakup.
The struggling retailer announced Thursday it had agreed to become a privately owned company in a $6.6-billion buyout deal proposed by a group that includes two equity firms and a real estate developer. The deal ended a seven-month auction that started as an effort to divide the sluggish toy business from the smaller, but more lucrative, Babies "R" Us segment.
Instead, the company agreed to be swallowed whole by Kohlberg Kravis Roberts & Co., Bain Capital LLC and Vornado Realty Trust, who will be equal partners.
There was no immediate word on the buyers' specific plans for the company's roughly 1,500 stores.
"We look forward to building on the many strengths of the company to make the stores a better place to shop and work," Michael M. Calbert, a director at the famed buyout firm KKR, said in a statement.
Toys "R" Us chairman and CEO John H. Eyler Jr. said it was up to the new owners to determine what stores, if any, would be closed.
But he said: "The new owners paid a significantly handsome price, and the only way you can pay that price is if you believe in the future of the business, so I expect this business to be around for a very long time."
Chris Byrne, an independent toy consultant, said a privately run Toys "R" Us will free executives from the pressure of quarterly earnings reports, and allow them to build a business that typically has the bulk of its sales around the December holidays.
"You have to expect that your second quarter is going to be slow and your third quarter is going to be slow, but that hopefully you're going to make it up in the fourth quarter," Byrne said.
Toys "R" Us has been losing market share in the toy business to industry leader Wal-Mart Stores Inc. and other discounters such as Target Corp. It announced in August it would separate its toy business from the Babies "R" Us segment, which sells children's apparel, furniture and accessories, but did not say how.
Some bidders reportedly wanted the whole company, though, rather than just part of it.
The deal comes amid gloomy prospects for the toy industry as discounters made the industry commodity-driven. Children are also growing out of toys faster, embracing high-tech gadgets like cell phones and iPod players, found at consumer electronics stores.
Many toy makers are fighting back by offering items other than toys, from children's furniture to child-friendly electronic gadgets.
Still, analysts predict it will be another tough year for toy makers. Overall traditional toy sales fell 3 percent to $20.1-billion in 2004, from $20.7-billion in 2003, following a 2.9 percent drop in 2003.
However, some toy vendors and analysts on Thursday said they hope a recharged Toys "R" Us Inc. could help energize the industry.
"Today's announcement added new life into the toy business," said Jim Silver, publisher of the Toy Book, a New York-based industry magazine. "I can envision Toys "R" Us becoming a family entertainment store, where you can buy an iPod or an entry-level digital camera. It will be a one-stop shop" for children and their parents.
The consortium will acquire all shares of Toys "R" Us for $26.75 a share, an 8 percent premium over Wednesday's close. The roughly 215-million Toys "R" Us shares outstanding account for $5.75-billion of the deal, with the remainder coming from outstanding options, nonvested restricted stock, warrants and convertible bonds, Eyler said.
The buyers are also assuming Toys "R" Us debt, which Fitch Ratings said totals about $2.3-billion. Fitch warned it might downgrade the debt to a B rating, three notches down from the current BB, because it appears the new owners will be taking on about $5-billion more in debt to finance the purchase.
Toys "R" Us shares jumped $1.23, or 5 percent, to close at $26 on the New York Stock Exchange.
Vornado and KKR representatives declined to comment on details of their plans, and a Bain Capital spokesman didn't immediately return a call.
Matt Levin, a managing director at Bain Capital, said in a statement that Toys "R" Us and Babies "R" Us "are premiere franchises with strong global brand recognition and a collection of high quality product offerings."
Eyler said there are no immediate plans to move the headquarters from Wayne, N.J., or to lay off workers. The company has 65,000 employees, a number that swells to more than 100,000 during the holidays.
Toys "R" Us had been a public company since 1978. The deal, expected to close by July, requires regulatory review and approval, the company said.
Eyler, and analysts, said they saw no impediment on either front.
Shares were trading at $16.42 in August when Toys "R" Us announced it would study restructuring. The buyout price of $26.75 a share is nearly 63 percent above that. "It's hard to believe that Toys "R' Us share price would be anywhere near this level without this process," said Sean P. McGowan, an analyst at Harris Nesbitt.