b&b194: Who really bankrupted Toys R Us & how small businesses can fill the gap
Six months ago, after 69 years in business, Toys R Us filed for bankruptcy. Two days ago, it announced that all 800 of its American stores, and all 100 of its British ones, are closing or being sold. As many as 33,000 workers could lose their jobs. As recently as last year, the company still accounted for 20 percent of all U.S. toy sales.
So who killed Toys R Us? It wasn’t Amazon or Walmart…listen to find out about leverage buyouts and asset stripping.
Toys R Us has been around for 70 years. They filed for bankruptcy in September and they officially announced they are closing all of their stores…this week. And we wanna talk about who really killed Toys R Us. It wasn’t amazon. It wasn’t Walmart.
Toys R Us is still, even in filing for bankruptcy, 20% of toy sales still come out of Toys R Us.
A leveraged buyout is basically when a private equity firm, usually, uses debt to acquire another company. So they borrow money to buyout another company…and the crazy part is that the collateral in a leveraged buyout is the company that they are buying.
A leveraged buyout is super crazy because usually the ratio of debt is ten percent equity, so ten percent what the owner puts in, and ninety percent of it can be leveraged, so ninety percent of it can be financed and put into debt. The craziest thing about this is basically this debt is issued as bonds.
Leveraged buyouts are basically what caused a lot of companies to go bankrupt in the 80s.
One of the largest LBO (Leveraged buyouts) on record was the acquisition of the Hospital Corporation of America by Kohlberg Kravis Roberts & Co, or KKR, and Bain & Company [for] $33 billion dollars.
So, who really killed Toys R Us? …KKR and Bain & Company also were two of the three companies that purchased Toys R Us, so they love doing these LBOs. So let’s start with what happened. Six months ago, September 2017, Toys R Us had been open for 69 years, they filed for chapter 11 bankruptcy in September. It’s the second largest U.S. retail bankruptcy ever. It was one of 35 retail bankruptcies in 2017.
[Toys R Us had] 20% of all toy sales…their revenue was increasing…it was between 11 billion and 13 billion every year.
The idea with leveraged buyouts is bringing the company from being a public company to a private company…and hopefully saving the mediocre returns, or the decline in sales, to kind of bring it back to “Okay, now you don’t have the expectation of quarterly earnings, let’s go back to fundamentals.”
Here’s what happened if we go way back: Toys R Us was purchased by 3 private equity firms, they did this leveraged buyout, they bought back all of the stock from the shareholders…but basically what this means is this private equity firm wanted to own Toys R Us and so what happens is Toys R Us was public at the time in 2004 and, in 2005 when these private equity firms decided to buy it, they actually have to physically buy all of the stock back form the shareholders, and take it private again. It was bought by KKR, (Kohlberg Kravis Roberts & Co) and a real estate investment firm Vornado, Vorando Realty Trust, and Bain & Company.
The loss that’s being created isn’t just for the people who work in the place. It’s for the consumers too and the marketplace in general, which is weird to say about a gigantic near-Monopoly like Toys R Us because we should be celebrating the downfall of, what makes it weird is that it’s portending something even more scary.
A lot of these retail companies got involved in these leverage buyouts and now they’re all bankrupt because the debt that they took on, that private equity firms bought, that private equity firms structured for them, they’re the ones responsible for paying it back and the people who are making the money off of it are these private equity firms–not just from owning these companies, but also from the advisory fees that they charge.
So the crazy thing is Toys R Us is now responsible for this massive debt, while they sold the company because their stock was losing value, because they were having trouble increasing revenue, and now they have this huge debt to pay.
So on top of Toys R Us now having to pay off this debt, because Bain capital and KKR are private equity firms, they actually charge advisory fees and management fees to now manage the company, so they actually made 200 million dollars…in advisory and management fees…so essentially they took all of the cash out of the company.
Toys R Us, before the buyout in 2004, had 2.2 billion dollars in cash…by the first quarter of 2017, they had 301 million dollars in cash, and the debt had gone up from 2.3 billion dollars that they owed, to 5.2 billion dollars. Which ended up being, every single year this meant, Toys R Us had to pay 400 million dollars in debt back. Every single year.
What this private equity firm was able to do is they basically took this company, they wrote it off as a loss ‘cause it wasn’t making any money, and then they were also able to charge it advisory management fees. The other thing is they tried to do something shady with Toys R Us in 2010. So, once they pulled out all the cash from Toys R Us…they tried to take the company public again in 2008 they tried to get the public, future shareholders of Toys R Us to buy back into Toys R Us, to raise money, again.
So the company went public, then it went back to private, and this private equity firm took all, basically stripped the company of all of its assets, and then in 2010, five years later, they were like “Oh, the company has no more money so let’s raise money by putting it back on the market!” It’s wild.
The thing is, these retailers, it’s not like people weren’t going there. You were just talking about how Toys R Us was still making a profit when they filed for bankruptcy, they were still making money. So people still need the things that these big-box retailers have, it’s just, now that they’re shutting down, where are they gonna get them from, right? They’re getting them from the local shops.
More than 98% of retailers are actually small businesses where they employ fewer than fifty people, and so there is this vacuum of consumerism that needs to be filled as these big box retailers close down and one thing that these big buck retailers did is they did only give us limited options and limited choices for what we could buy and what we had access to, and now that these companies are being taken down essentially by their own ideas of success, ultimately, that is an opportunity for people if you do have an idea, if you do wanna start a business, now is actually a really great time to do it.
There’s a need we need to fill now as these small business owners, and we don’t have to take over the world to do it.