Toys ‘R US

Toys ‘R Us was purchased in a leverage buyout by funds sponsored by Bain, KKR and Vornado in July 2005.

According to PitchBook Data, a well-regarded source of data on private equity,

Toys ‘R Us debt level prior to the Leveraged Buyout by Private Equity in 2005:

Debt = $1.86 billion

Equity = $4.30 billion

Enterprise value of $6.16 billion

30% debt, 70% equity – typical of publicly traded companies

Return on equity = 6.1%

Cash available to distribute to stock holders = $252 million

According to Pitchbook, debt level after the Leveraged Buyout by Private Equity in 2005:

Debt over $5.0 billion

Equity $1.4 billion – about $1.29 billion by the three investment funds, about $11 million from
individual investors. The PE sponsors put up about $60 million, less than 5% of the equity and
less than 1 percent of the purchase price.

Enterprise value of $6.60 billion after the buyout

78% debt, 22% equity

September 18, 2017 declared bankruptcy. According to PitchBook, at that time, the return on equity was
-22.8%, and net income available to stock holders was -$612 million.

This wiped out the investments by the public pension funds and other limited partner investors in the
three funds.

How did the private equity sponsors make out?

According to the FT, the three funds contributed equally to the equity.

According to Dan Primack (was at Fortune, now at Axios), if the three funds contributed equal amounts
of equity, then each of the three funds put up $433 million ($1.29 billion/3). Bain contributed 10 percent
of the equity in its fund or $43 million. KKR according to its website put up $10 million (2.3% of the
equity in its fund). I don’t have numbers for how much Vornado contributed to its fund. Toys ‘R Us
entered into a management services agreement with each of the three sponsoring firms (NOT the
funds). The management services agreement specified payments that Toys R US would make to the
three firms that sponsored the PE funds for monitoring and advisory services. Over the life of the
agreement, Toys ‘R US paid Bain, KKR and Vornado $61 million each. Bain did not agree to share these
payments with its limited partners. It made out just fine contributing $43 million and receiving $61
million for a profit of $17 million. KKR had agreed to share 58% of these fees with its limited partners.
That left KKR with $24 million. KKR had contributed $10 million to its PE fund, leaving it with a net profit
of $14 million. These figures do not include expenses and transactions fees the PE firms charged to the
funds they sponsored. It also does not include interest payments the firms received from Toys ‘R Us on
loans they made to the toy retailer at the time of purchase.

Toys ‘R Us has now announced that it is not only bankrupt, but it is liquidating its entire operation in the
U.S. That means it is closing nearly 800 Toys ‘R Us and Babies ‘R Us stores in the U.S., undermining malls
ad Main Streets where it was an anchor store that drew shoppers to the area. More than 30,000
workers are losing their jobs. Pension funds and other investors in the three PE funds have had their
investment in Toys wiped out. Creditors and vendors will be lucky to get pennies on the dollar of what
they are owed. But the PE firm sponsors will walk away with millions of dollars in profit. Not the
winnings they were hoping for, but a very nice consolation prize.