Why isn’t this a crime, or at least a civil wrong? Private equity firms borrow money to buy a company. They then load the company up with more debt, using the proceeds to pay themselves dividends. The private equity firms make out like bandits, but often times the debt-hobbled firms go under. Toys ‘R’ Us presents a case study. From Wolf Richter at wolfstreet.com:
They Come Under “Intense Scrutiny” by the Pension Funds that Feed Them. But this too shall pass.
For the past three mornings, Toys ‘R’ Us has tweeted the countdown of its demise:
- On Saturday: “Only 6 Days Left! #toysrusclosingsale”
- On Sunday: “Hurry! Only 5 Days Left! #toysrusclosingsale #toysrus #babiesrus #alwaysatrukid”
- And on Monday: “Hurry! Only 4 Days Left! #toysrusclosingsale #babiesrus #toysrus #alwaysatrukid”
On June 29, its remaining stores in the US will close. And then it’s over of the iconic retailer — one more victory for PE firms that have plowed into retail during the leveraged buyout boom before the Financial Crisis, loaded them up with debt, and watched them collapse in what I have come to call the brick-and-mortar meltdown. Toys ‘R’ Us is just one of them.
PE firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us via a $6.6 billion LBO in 2005. They funded the acquisition in large part by loading up the acquired company with debt — hence “leveraged buyout.” In other words, the PE firm had little skin in the game, and over the years extracted $400 million in fees even as the retailer died.
The 33,000 employees, when it is all said and done in a few days, will be out of a job.
In a sense, the end came very rapidly, after 13 years of building up to it under the PE-firms’ iron cost-cutting fist. The meltdown started in early September when rumors emerged that Toys ‘R’ Us had hired a bankruptcy law firm. Its bonds collapsed on the spot. On September 18, the company buckled and filed for bankruptcy, assuring everyone that it would go on as a going concern. In early March, it became apparent that liquidation would be next. On March 15, the company announced it would liquidate all its operations in the US and Puerto Rico. And it began “final liquidation sales” at all its remaining Toys“R”Us and Babies“R”Us stores.
To continue reading: In 3 Days, the Last Toys ‘R’ Us Stores Die. And PE Firms Behind it?