Bain, KKR, Vornado suffer wipeout in Toys `R' Us bankruptcy

Tuesday , September 19, 2017 - 12:31 PM

David Carey

(c) 2017, Bloomberg.

Bain Capital, KKR & Co. and Vornado Realty Trust stand to have their Toys “R” Us Inc. investment erased as the retailer they bought in 2005 for $7.5 billion seeks bankruptcy protection.

The three firms and their co-investors sank $1.3 billion of equity into the takeover of the Wayne, New Jersey-based toy company, financing the rest with debt, according to company filings. The debt included senior loans in which they held a stake.

Partly offsetting the loss is more than $470 million in fees and interest payments that Toys “R” Us awarded the firms over time.

Toys “R” Us, which has 1,600 stores in 38 countries, filed for bankruptcy late Monday. The filing in Richmond, Virginia, estimated that the company has more than $5 billion in debt, which costs about $400 million a year to service.

The buyout was part of a vast wave of debt-enabled takeovers by private equity firms from 2005 to 2007 that saw deal prices soar to tens of billions of dollars. The wave crashed at the onset of the financial crisis in 2009.

The biggest of that era’s private equity deals was the $48 billion buyout of Texas utility TXU, now called Energy Future Holdings Corp. The company went belly-up in 2014, obliterating $8.3 billion of equity put in by KKR, TPG Capital, Goldman Sachs and co-investors.

Toys “R” Us appeared stable out of the gate. The $7.5 billion price worked out to about 7.5 times earnings before interest, taxes, depreciation and amortization -- not outlandish by today’s standards. With about $1 billion a year in Ebitda, the company was able to cover the interest on its $5.5 billion of debt and fund store improvements with more than $200 million to spare.

But the ravages of the financial crisis, competition from online rivals and price wars blew up that safety cushion.

KKR and Vornado, which are publicly traded, had previously written their investments in the company down to zero. As a result, the bankruptcy won’t affect their earnings going forward.

Aside from Toys “R” Us, KKR’s mid-2000s buyouts of retailers have performed well. The New York-based private equity firm made several times its investment in British drugstore chain Alliance Boots, and it scored a multibillion-dollar gain -- more than 4.5 times its investment -- from its $7.3 billion purchase of Dollar General Corp.

Boston-based Bain reaped gains from buyouts of Michaels Stores, Canadian discount chain Dollarama and Burlington Coat Factory. Another takeover from the era, Guitar Center, has struggled.

Representatives of KKR and Bain declined to comment. A spokeswoman for New York-based Vornado didn’t return a message seeking comment.

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Keywords: BAIN-KKR-VORNADO-TOYS-R-US

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