Toys R Us Case Questions Essay
Case Questions #5
Toys “R” Us LBO
1. What are the risks and merits of the transaction?
This LBO transaction has both risk and profit potential. KKR, Bain, and Vornado Realty Trust face risk because the industry that Toys “R” Us (toys) is currently in, the retail toy industry, is in a decline. Industry sales have been down 4% in the last year, and analysts don’t have a positive projection for future sales in the US. This declining industry, and threat of new competitors such as Walmart and Target, make it hard to be profitable which makes it extremely risky for KKR, Bain, and Vornado. Another factor that needs to be considered when calculating risk, is that this transaction is a club deal, meaning that more …show more content…
Before the acquisition, Toys “R” Us (Toys) had 35% of the firms capitalization financed by debt (65% equity). After the acquisition, Toys had $2.3 billion of assumed existing debt and $4.4 billion of new debt for a total of $6.7 billion of debt, meaning Toys debt represented 83.7% (compared to 35% before the acquisition). Toys became significantly more leveraged from the transaction.
The debt sources are summarized (in millions) in the following table: Existing Debt: | $2,312 | Senior secured credit facility | $700 | Unsecured bridge loan | $1,900 | Mortgage loans | $800 | Secured European bridge loan | $1,000 | Total: | $6,712 |
4. What are the potential exit alternatives for this investment?
There are three potential exit strategies for this investment. First, to exit and sell the firm, they can participate in an IPO since Toy’s is not currently public. Another exit strategy is the consortium can sell Toys to a strategic buyer they are competing with such as Walmart or Target. Another exit alternative would be to sell it to another financial investor such as another private equity firm.
5. Recommend whether or not to join the consortium, and why.
I would recommend on joining the consortium on this LBO transaction. First, Bain, KKR, and Vornado are purchasing Toys “R” Us at a huge premium, 122.5%. Since Toys is facing a difficult industry