How vulture capitalists ate Toys 'R' Us • Hacker News Board

Re: How vulture capitalists ate Toys 'R' Us

#91

Post by dbatten » Mon, Apr 23, 2018, 7:14 PM UTC

The author seems to be bending over backwards to make the buyers look like evil masterminds that profited from running Toys R Us into the ground...

For example, he notes that they'll have to write off their investment in Toys R Us, but makes it sound like they're making out like bandits because they got $200 million in management/consulting fees out of the deal. So, they lost a $6.6 billion investment, and made $200 million in management fees? Doesn't sound like a very successful evil plot to me.

More importantly, what if this had been a success? What if they had bought Toys R Us and orchestrated a phenomenal turn-around? Would this still be a story? Would they be evil, but this time they'd be evil because they stole a public company for pennies on the dollar (a la the Dell lawsuit) and made bank when it returned to growth and profitability?

A significantly more dispassionate discussion about the debt burden that goes along with a leveraged buyout would have been far more interesting to read.

Re: How vulture capitalists ate Toys 'R' Us

#92

Post by JumpCrisscross » Mon, Apr 23, 2018, 7:14 PM UTC

metabagel wrote: post #85

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

I think you may have missed the part where Toys 'R' Us' debt skyrocketed from $109M to $5B due to the leveraged buyout. The interest on that debt as well as the exorbitant management fees did Toys 'R' Us in. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...

> the exorbitant management fees

These are charged to the fund (i.e. the investors), not the company. PE firms charge companies transaction fees. "Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1].

Private equity isn't VC. When a holding goes bust, the fund loses a lot of money. That, in turn, sharply limits what fund managers can do and how much they can pay themselves, including from other better-performing investments.

[1] https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-...

Re: How vulture capitalists ate Toys 'R' Us

#93

Post by replicatorblog » Mon, Apr 23, 2018, 7:14 PM UTC

rayiner wrote: post #67

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

Yeah, seriously, the author is nuts. I've got a 5-year old and I can't remember the last time I've been to Toys R Us. She knows how to pick stuff out on Amazon; for trinkets there's Target, and a lot of her "toys" now are on her iPad/digital. Suburban big-box retail stores aren't a growth area, and toy stores selling Chinese-made junk are probably among the worst situated. Unlike, e.g. clothes or food, there is littl…

This is an excellent point. I don't think I've read an account of the TRU fiasco from the POV of a person with kids. By my read, TRU's problem isn't debt or Amazon, but changing substitutes. E.g.:

+ YouTube + Amazon: Lets kids see what a toy looks like in HD, whereas previously you'd need to go to a store to see the big images on the box, or to press the "try me" buttons. As you said, the brand drives most of the sales, so the store experience adds little.

+ Advanced Supply Chains/McDonalds: The toys in Happy Meals are insanely nice, I wouldn't be surprised to see them retail for $5-10 at a toy store. High-quality toys are throw-ins for a lot of stores now, obviating the need for a special purpose store, save for Christmas/Birthdays.

+ YouTube + Grocery Store: The rise of Surprise Eggs over the last few years has been astounding, to the point that a decent amount of our toy budget is spent at the checkout line at the grocer, where these eggs are increasingly on offer.

+ YouTube + DIY: The explosion in popularity of DIY slime is another development where tactile time is invested in a project rather than a packaged toy.

+ Apps: The YouTube Kids app and the many thousands of quality games on offer in the app store are great substitutes for plastic junk.

No doubt debt played a role, but I think almost every story has underplayed massive changes in the toy market that are an additional headwind to the industry.

Re: How vulture capitalists ate Toys 'R' Us

#94

Post by jjeaff » Mon, Apr 23, 2018, 7:16 PM UTC

metabagel wrote: post #85

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

I think you may have missed the part where Toys 'R' Us' debt skyrocketed from $109M to $5B due to the leveraged buyout. The interest on that debt as well as the exorbitant management fees did Toys 'R' Us in. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...

They may have done a bad job, but they didn't come out ahead. They lost a tone of money on the deal.

Re: How vulture capitalists ate Toys 'R' Us

#95

Post by metabagel » Mon, Apr 23, 2018, 7:17 PM UTC

reverend_gonzo wrote: post #27

This is written as if the entire purpose of buying Toy R US is to drive it into the ground. Those buying it, and those providing the loans to buy it, lost a lot of money on a bet that they could turn it around. They lost the bet, and so be it. The previous shareholders got paid and were able to move their capital out into something they believed would provide better returns. Sure, a lot of people lost their jobs. On…

We don't really know that they lost the bet. In fact, it seems equally, if not more likely that they profited on the deal, by siphoning money out of the company over the last 12 years. This is a good primer on how these firms operate:

https://www.rollingstone.com/politics/news/greed-and-debt-th...

Re: How vulture capitalists ate Toys 'R' Us

#96

Post by poof131 » Mon, Apr 23, 2018, 7:18 PM UTC

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

Why do I doubt they are the real losers here? Bloomberg states that they pocketed over $470M in fees.[1] And I imagine they were able to write off losses against wins elsewhere. So the real losers still seem to be the employees and the American people. A few years back I was talking to an east coast banker turned VC and he was pooping on the leveraged buyout industry. He said that all the debt payments are tax deductible, so you take a cash flow positive company, saddle it with debt, and essentially stop paying taxes to the government and turn that into payouts for the investors.[2] He said if you look at other countries with different tax policies in regards to debt, you don’t find the same scale of the industry. Perhaps with a better tax policy we could have seen a more natural outcome for Toys ‘R’ Us? I assume unfortunately that the limit on deductions in the second linked article never made it into law and went the way of closing the carried interest loophole.[3]

[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-... [2] https://www.reuters.com/article/us-usa-tax-privateequity/u-s... [3] https://www.thedailybeast.com/republicans-love-welfarefor-th...

Re: How vulture capitalists ate Toys 'R' Us

#97

Post by benmmurphy » Mon, Apr 23, 2018, 7:18 PM UTC

toss1 wrote: post #58

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

Agree they "Vultures" were the suckers in this case. Although I was initially inclined to agree with the tone of the article, just the numbers in the article itself disproved it's main thesis. Near the end: > "Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership." Near the beginning: >"The trio pu…

the article doesn't go into much detail about what the management fees were for or how much of the fee would be profit to the LBO group. its entirely possible that the LBO groups have a management staff on hand they parachute into their investments and this fee pays their wages and there is nothing much else left over.

Re: How vulture capitalists ate Toys 'R' Us

#98

Post by justherefortart » Mon, Apr 23, 2018, 7:19 PM UTC

metabagel wrote: post #87

JumpCrisscross wrote: post #54

Earlier quoted context omitted.

> Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. Bain et al lost over a billion dollars. Not only did they invest the equity, they also loaned some of the debt out of their own funds.

They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.

Exactly, where'd that 5 billion in loans go? Poof!

Re: How vulture capitalists ate Toys 'R' Us

#99

Post by jjeaff » Mon, Apr 23, 2018, 7:21 PM UTC

ISV_Damocles wrote: post #78

jimmaswell wrote: post #72

Earlier quoted context omitted.

A problem is that in a retail store, you might walk by something new and want to try it. On Amazon et al you're largely going to stick with what you know, and the site's recommendations are probably not going to stray much. Additionally, walking out of a store with something is a nice experience, maybe reading the manual on the way home, instead of waiting a week to get something unless you have prime or pay for fast…

What you've described doesn't sound like a value-add at all to me. In stores they can manipulate your senses to get you to make emotion-based purchases whether or not it makes economic sense or if you're going to actually get your money's worth out of the product. You only think it's better reading the manual on the way home and not waiting a few days because you're still riding that emotional high. I much prefer the…

>that detachment helps you keep a more level head while purchasing

I kind of doubt that this is really the case in practice. There is detachment from the walk by impulse buys. But there is also detachment from the part where you spend your money. One click purchases are just too easy.

And Amazon suggestions are getting better all the time at convincing you to buy more and more. Not to mention the discounts on auto delivered products.

The store can only entice me when I decide to get in a car and drive there and walk in. Amazon is just a click or tap away from absolutely anywhere.

Re: How vulture capitalists ate Toys 'R' Us

#100

Post by JumpCrisscross » Mon, Apr 23, 2018, 7:21 PM UTC

metabagel wrote: post #87

JumpCrisscross wrote: post #54

Earlier quoted context omitted.

> Did Bain use its own money to buy Toys R Us? No, it was a leveraged buyout. They already made a profit on the transaction. Bain et al lost over a billion dollars. Not only did they invest the equity, they also loaned some of the debt out of their own funds.

They also charged exorbitant management fees. It seems at least possible that they didn't actually lose money on the deal. Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us.

> Being a private company, it might be hard to find out how much cash they extracted from Toys 'R' Us

The firms got $470 million in fees and interest against their $1.3 billion investment [1]. Bain et al lost money. These numbers were disclosed in SEC and bankruptcy filings.

[1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...