Did Toys R Us turn down a purchase deal?

Published on: 6th June 2018

Reports indicate that the retailer pulled back from acquisition talks with Sycamore Partners and Target, instead opting to liquidise for a better return. 

As reported by Bloomberg News, the private-equity firm Sycamore Partners held advanced talks with Toys R Us earlier this year about acquiring the chain and keeping open half its 800 US locations, according to anonymous sources familiar with the matter.

Target also seriously pursued buying some of the retailer’s assets, including the parent registry and website of its Babies R Us brand, one of the sources said. But those potential deals collapsed in February when the retailer’s senior creditors decided there would be a better return by selling off assets during a liquidation of the US retail business. By mid-March, management publicly disclosed the shutdown after a Bloomberg News report that it was preparing for that option.

Lenders were reportedly convinced that they would create more value from selling the brands apart from the store estate because they were already generating millions in licensing fees from overseas divisions. For example, Toys R Us in Asia paid royalties to the US parent for the right to use its brands. That led lenders to believe they could licence its intellectual property out to additional entities, plus whoever might take over the US retail operations, which entered bankruptcy in September.

That scenario hasn’t materialised – but it still could. The company will begin auctioning off its brand names and customer data on 18th June. An approved buyer hasn’t emerged to keep any of the US Toys R Us stores open, which are expected to all close this summer after selling off merchandise.

While the talks with Sycamore didn’t lead to a deal, it does show that there was legitimate interest in maintaining operations at Toys R Us and avoiding the loss of 33,000 US jobs.

Early on, lenders backed the idea of finding a buyer, the sources said. But as it became clear how much the chain struggled during the holiday-shopping season, creditors led by Solus Alternative Asset Management turned toward liquidation, some of the sources said. The lenders wanted the company to announce its US shutdown in mid-February. But the retailer pushed back, and got another month to pursue other options, which proved fruitless.

Solus didn’t comment on its role in the bankruptcy of Toys R Us.

The involvement of Solus and other firms underscores how distressed-debt investors – little known outside the financial world – play pivotal roles in bankruptcies. Its core strategy is to buy up assets of troubled companies, and then enact a plan to increase their value.

In the case of Toys R Us, that ended up meaning liquidation.


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