Toys 'R' Us, the nation's second largest toy retailer has been sold for $6.6 billion to a partnership that includes Kohlberg Kravis Roberts & Co., Bain Capital Partners and the real estate company Vornado Realty Trust. Toys 'R' Us has been losing ground in recent years in the cutthroat retail toy market due to ruthless competition from Wal-Mart and other discount retailers (see 'Wal-Mart Applying Toy Category Kill Shot'). Toys R' Us had cut its workforce by 14% and closed some stores in recent years, but the chain, which currently has 681 toy stores in the U.S. and 601 abroad, has been unable to overcome competition from larger rivals. Even before last year's disappointing holiday season, stories about the sale of TRU were common (see 'Toys 'R' Us on the Block?').
The investment group will take TRU private by acquiring all the outstanding shares for $26.75 per share (an 8 percent premium to yesterday's closing price of the stock) and then will most likely dismember the company. The profitable Babies 'R' Us branch will be split off and many of the Toys 'R' Us toy stores will likely be sold to raise cash and boost profits.
Billionaire Eddie Lampert's takeover of K-Mart, which has featured lots of real estate sales, is the model that TRU's new owners will seek to emulate. A large number of Toys 'R' Us stores are in prime off-mall locations -- the retail real estate sector that has been rising in value the fastest in recent years, and analysts estimated that TRUs real estate value is five times greater than the value of its toy business. The importance of TRU's real estate holdings in this transaction can be seen in the inclusion of Vornado Realty Trust in the investment group.
The other new owners of Toys 'R' Us are among Wall Street's most well-known bottom-feeders (euphemistically known as 'buyout specialists'). Bain Capital purchased the foundering KB Toys back in 2000 and has invested in Burger King and helped Edgar Bronfman Jr. take over Warner Music. Kohlberg Kravis & Roberts, better known as KKR, were the iconic corporate raiders of the 1980s, when they engineered the takeovers of companies like Safeway and RJR Nabisco.
