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How vulture capitalists ate Toys 'R' Us

theweek.com

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Re: How vulture capitalists ate Toys 'R' Us

#101

Post by bhouston »

dbatten wrote: post #91

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…

EDIT: This comment is wrong.

> 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.

They only had to put up 20% of the 6.6B, thus $1.32B. The rest was put up by bond investors I believe.

TRU was also paying upwards of $425M per year on the debt it had. Assuming that 20% of that was to the holders of the $1.32B debt, you get $90M of interest payments. Given that the LBO happened in 2004, there have been 13 years of interest payments, which totals now $1.1B roughly. I am unsure if any principle was paid off, there are no details for that.

Thus $1.1B in interest + $200M in management fees = $1.3B of their investment, discounting inflation adjustments.

Basically KKR, Bain and others are at least close to net zero even though they caused TRU to fail completely.

Lastly, bankruptcy just means that it is insolvent, it doesn't mean that the current debtors get nothing. If the debtors in this case had control over TRU they can ensure it goes bankrupt early enough that it can cover the liabilities to its debtors, namely themselves. If the debtors can get even 50 cents on the dollar, they are net winners.

Re: How vulture capitalists ate Toys 'R' Us

#102

Post by tspike »

jimmaswell wrote: post #72
rayiner wrote: post #67

Earlier quoted context omitted.

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…

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…

I hadn't been into one in ages, but about six months ago I went into one with my toddler and was shocked how completely un-interactive the experience was. There was almost nothing for him to play with. Just aisle after aisle of hermetically sealed boxes with bright fluorescent lighting and sullen employees.

Couldn't see what the value add was. I'll take my local toy shop, thanks.

Re: How vulture capitalists ate Toys 'R' Us

#103

Post by ams6110 »

replicatorblog wrote: post #93
rayiner wrote: post #67

Earlier quoted context omitted.

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 sal…

The other problem is that Toys R Us was a terrible retail experience. Warehouse-like, dim flourescent lighting, reminiscent of an old KMart. Dirty floors, unattractive steel shelves in narrow aisles for displaying merchandise. Indifferent, bored workers. I think I shopped there twice before giving up.

Re: How vulture capitalists ate Toys 'R' Us

#104

Post by bhouston »

harryh wrote: post #11
Disillusioned9 wrote: post #6

Earlier quoted context omitted.

Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.

limited downsides It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.

According to my calculations in this comment they are at least close to net zero: https://news.ycombinator.com/item?id=16906549 Which is pretty good outcome for them given TRU has failed completely.

Re: How vulture capitalists ate Toys 'R' Us

#105

Post by JumpCrisscross »

Retric wrote: post #80
JumpCrisscross wrote: post #47

Earlier quoted context omitted.

> when that happens private equity simply takes out more loans until the company fails This is incorrect. "PE-backed firms are no more likely to default than other firms with similar leverage. Distressed PE-backed firms restructure more out of court, restructure faster, and are more likely to remain an independent going concern following the restructuring, compared to leveraged borrowers that are not PE-backed...Henc…

compared to leveraged borrowers is hardly a reasonable comparison as as toys r US did not fall into that category before the buyout.

Un-leveraged companies don't need to restructure; the comparison is apt for the question which is asked. In any case, your claim that most PE-backed companies fail is patently false.

Re: How vulture capitalists ate Toys 'R' Us

#106

Post by metabagel »

JumpCrisscross wrote: post #92
metabagel wrote: post #85

Earlier quoted context omitted.

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 bu…

Sorry, advisory fees. We don't know how much they siphoned out of Toys 'R' Us over the last twelve years, and without that information it's premature to say that they lost money on the deal.

Re: How vulture capitalists ate Toys 'R' Us

#107

Post by harryh »

bhouston wrote: post #101
dbatten wrote: post #91

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…

EDIT: This comment is wrong. > 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. They only had to put up 20% of the 6.6B, thus $1.32B. The rest was put up by bond investors I believe. TRU was also paying upwards of $425M per year on the debt it had. Assuming that 20% of that was to the holders of the $1.32B debt, you get $90M of in…

Assuming that 20% of that was to the holders of the $1.32B debt

This is a very poor assumption. The PE firms bought equity in TRU, they are not paid back in the same way and on the same schedule as holders of debt.

Re: How vulture capitalists ate Toys 'R' Us

#108

Post by toss1 »

benmmurphy wrote: post #97
toss1 wrote: post #58

Earlier quoted context omitted.

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.

>"doesn't go into much detail" -- the article specifically stated that they totaled $200m in fees. The author was specifically trying to find and account for those fees. If there were more, the author would have included it as more fees supported his point better.

So, you are claiming that the author somehow didn't find over a billion dollars in fees for them to break even over 15 years? If so, he's a pretty incompetent journalist. And, even if there are a billion in 'hidden' fees, they still lost money.

For them to have made even a modest 5% interest for 15 years, which is a very modest/baseline profit goal for finance pros, you'd need to find almost $2billion in missing fees.

So, where's the money?

Re: How vulture capitalists ate Toys 'R' Us

#109

Post by JumpCrisscross »

metabagel wrote: post #106
JumpCrisscross wrote: post #92

Earlier quoted context omitted.

> 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 bu…

Sorry, advisory fees. We don't know how much they siphoned out of Toys 'R' Us over the last twelve years, and without that information it's premature to say that they lost money on the deal.

> We don't know how much they siphoned out of Toys 'R' Us over the last twelve years

Yes, we do. It's disclosed in SEC and bankruptcy filings; they lost money [1].

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

Re: How vulture capitalists ate Toys 'R' Us

#110

Post by metabagel »

justherefortart wrote: post #98
metabagel wrote: post #87

Earlier quoted context omitted.

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!

The bulk of that was not KKR or Bain's money. They were loans that Toys 'R' Us took on as part of the LBO.
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