Private Equity Fucks Toys R Us

[RVonse]

$460 million in operating profit while having how much in assets on its balance sheet? That number tells us nothing without knowing how big the balance sheet is.

If they have, say, 10 billion in assets (or more), and their operating profit is falling (as seems to be the case for 2017), then that is not very good at all.

There is a thing called opportunity cost: the assets may be redeployed and earn a higher return with some other use. That has nothing to do with private equity or debt but rather the company's poor return on assets.

You are missing the point about the situation. Before the debt-laden acquisition, Toys R Us was not in danger of liquidation. Right after the debt-laden acquisition, it is being liquidated. If you look at this as an event study, a reasonable conclusion is that it was the debt-laden acquisition that was the cause.

The low return on assets for an otherwise profitable business suggest a reallocation or restructuring of those assets by the business, not liquidation.

+1 Agree.
The OP clearly made this point.
Jimmy Higgins made this point.
And you have now made this point.

Yet leave it to Auxulus and Dismal to start jumping the shark and completely missing the entire point.

It should not even be allowed for a private equity firm to destroy a perfectly good company. But in America it happens all the time. That is what we should be talking about here.

 

[coloradoatheist]

$460 million in operating profit while having how much in assets on its balance sheet? That number tells us nothing without knowing how big the balance sheet is.

If they have, say, 10 billion in assets (or more), and their operating profit is falling (as seems to be the case for 2017), then that is not very good at all.

There is a thing called opportunity cost: the assets may be redeployed and earn a higher return with some other use. That has nothing to do with private equity or debt but rather the company's poor return on assets.

You are missing the point about the situation. Before the debt-laden acquisition, Toys R Us was not in danger of liquidation. Right after the debt-laden acquisition, it is being liquidated. If you look at this as an event study, a reasonable conclusion is that it was the debt-laden acquisition that was the cause.

The low return on assets for an otherwise profitable business suggest a reallocation or restructuring of those assets by the business, not liquidation.

+1 Agree.
The OP clearly made this point.
Jimmy Higgins made this point.
And you have now made this point.

Yet leave it to Auxulus and Dismal to start jumping the shark and completely missing the entire point.

It should not even be allowed for a private equity firm to destroy a perfectly good company. But in America it happens all the time. That is what we should be talking about here.

But it wasn't right after the debt laden acquisition. It was 12 years later. What did the company do with the $6billion they got in loans? Was it spent wisely? How much higher as a percentage of debt payments compared to other stores like WalMart.

Not sure at the time what made Toys R Us make that decision, but the sentiment in the early 00s was to get out of the Stock Market instead of embracing it.

 

[Jimmy Higgins]

+1 Agree.
The OP clearly made this point.
Jimmy Higgins made this point.
And you have now made this point.

Yet leave it to Auxulus and Dismal to start jumping the shark and completely missing the entire point.

It should not even be allowed for a private equity firm to destroy a perfectly good company. But in America it happens all the time. That is what we should be talking about here.

But it wasn't right after the debt laden acquisition. It was 12 years later. What did the company do with the $6billion they got in loans? Was it spent wisely? How much higher as a percentage of debt payments compared to other stores like WalMart.

Not sure at the time what made Toys R Us make that decision, but the sentiment in the early 00s was to get out of the Stock Market instead of embracing it.

Immediately after the takeover, their credit rating dropped due to the leveraged debt which made their borrowing costs soar relative to before the leveraged buyout.

It seems funny that people were crapping on those families that overleveraged to buy their home, yet when private equity firms do it...

 

[Harry Bosch]

+1 Agree.
The OP clearly made this point.
Jimmy Higgins made this point.
And you have now made this point.

Yet leave it to Auxulus and Dismal to start jumping the shark and completely missing the entire point.

It should not even be allowed for a private equity firm to destroy a perfectly good company. But in America it happens all the time. That is what we should be talking about here.

But it wasn't right after the debt laden acquisition. It was 12 years later. What did the company do with the $6billion they got in loans? Was it spent wisely? How much higher as a percentage of debt payments compared to other stores like WalMart.

Not sure at the time what made Toys R Us make that decision, but the sentiment in the early 00s was to get out of the Stock Market instead of embracing it.

Immediately after the takeover, their credit rating dropped due to the leveraged debt which made their borrowing costs soar relative to before the leveraged buyout.

It seems funny that people were crapping on those families that overleveraged to buy their home, yet when private equity firms do it...

Jimmy: I agree with you that these private equity guys were the final nail in the coffin. But the companies previous poor management lowered the share price allowing the equity guys to take over in the first place.

 

[coloradoatheist]

Immediately after the takeover, their credit rating dropped due to the leveraged debt which made their borrowing costs soar relative to before the leveraged buyout.

It seems funny that people were crapping on those families that overleveraged to buy their home, yet when private equity firms do it...

Jimmy: I agree with you that these private equity guys were the final nail in the coffin. But the companies previous poor management lowered the share price allowing the equity guys to take over in the first place.

I'm trying to find the information on that. When it sold it's share price was like $24 a share and looks like it had a market valuation in the mid $5 billion range. The buyout was a bad decision from management along with its performance prior to that.

 

[dismal]

Generally in the private equity world when one of your investments goes bankrupt you lose all your money - this is considered "bad". It's hard to do worse.

Yes. So why would 3 large private equity firms agree to go into significant debt in order to buy a 'failing' company that they did not bother to turn around?

aa

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

 

[Jimmy Higgins]

Immediately after the takeover, their credit rating dropped due to the leveraged debt which made their borrowing costs soar relative to before the leveraged buyout.

It seems funny that people were crapping on those families that overleveraged to buy their home, yet when private equity firms do it...

Jimmy: I agree with you that these private equity guys were the final nail in the coffin. But the companies previous poor management lowered the share price allowing the equity guys to take over in the first place.

You don't need to tell me about bad management. Maytag had a stock high of around $80 which eventually crashed due to crap management and the idiots that ran the show tried to sell out to a private equity firm, like in the Toys R Us case in order to get their money and run. Whirlpool ended up buying Maytag thankfully.

 

[Playball40]

Considering the management fees, interest payments and the fact that the 'debt holders' had a say - it is very likely the actual operation and stores suffered. They didn't have the funds to re-invest in their core competence in an effort to keep up. The loans? They went to BAIN CAPITAL!!

+1 Agree.
The OP clearly made this point.
Jimmy Higgins made this point.
And you have now made this point.

Yet leave it to Auxulus and Dismal to start jumping the shark and completely missing the entire point.

It should not even be allowed for a private equity firm to destroy a perfectly good company. But in America it happens all the time. That is what we should be talking about here.

But it wasn't right after the debt laden acquisition. It was 12 years later. What did the company do with the $6billion they got in loans? Was it spent wisely? How much higher as a percentage of debt payments compared to other stores like WalMart.

Not sure at the time what made Toys R Us make that decision, but the sentiment in the early 00s was to get out of the Stock Market instead of embracing it.

 

[Playball40]

They paid themselves first with new debt, then paid themselves hellacious fees that should have gone to operations. They've made their money three times over and will now make more on the liquidation. You act as if they are "out" something. They're not. But the employees and consumers sure are.

Generally in the private equity world when one of your investments goes bankrupt you lose all your money - this is considered "bad". It's hard to do worse.

Yes. So why would 3 large private equity firms agree to go into significant debt in order to buy a 'failing' company that they did not bother to turn around?

aa

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

 

[coloradoatheist]

They paid themselves first with new debt, then paid themselves hellacious fees that should have gone to operations. They've made their money three times over and will now make more on the liquidation. You act as if they are "out" something. They're not. But the employees and consumers sure are.

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

The three firms lost over a $1billion combined dollars in the deal, so it wasn't in their best interest either. But it was a bad decision. Toys R US hsould have stayed a public company.

 

[Playball40]

I guaranty Bain didn't lose shit.

They paid themselves first with new debt, then paid themselves hellacious fees that should have gone to operations. They've made their money three times over and will now make more on the liquidation. You act as if they are "out" something. They're not. But the employees and consumers sure are.

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

The three firms lost over a $1billion combined dollars in the deal, so it wasn't in their best interest either. But it was a bad decision. Toys R US hsould have stayed a public company.

 

[coloradoatheist]

I guaranty Bain didn't lose shit.

The three firms lost over a $1billion combined dollars in the deal, so it wasn't in their best interest either. But it was a bad decision. Toys R US hsould have stayed a public company.

Based on? The other two companies lost about $400 million apiece. Did Bain not put in the same amount the other ocmpanies did?

 

[dismal]

They paid themselves first with new debt, then paid themselves hellacious fees that should have gone to operations. They've made their money three times over and will now make more on the liquidation. You act as if they are "out" something. They're not. But the employees and consumers sure are.

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

You have no idea what you're talking about. WTF does "they paid themselves first with new debt" even mean?

It's about as coherent a sentence as "Cucumber pants june-bug left wine spritzer jello shots".

 

[coloradoatheist]

They paid themselves first with new debt, then paid themselves hellacious fees that should have gone to operations. They've made their money three times over and will now make more on the liquidation. You act as if they are "out" something. They're not. But the employees and consumers sure are.

I would guess they were operating on some thesis that didn't pan out. That they could turn it around. Or at least tighten up its cost structure. High leverage + modest improvement in business = big returns to the equity.

You have no idea what you're talking about. WTF does "they paid themselves first with new debt" even mean?

It's about as coherent a sentence as "Cucumber pants june-bug left wine spritzer jello shots".

They spent $1.6 Billion on the deal, and got back about $500 million in fees over the years. So on that they lost $1 billion. There interest payments were about $500 million a year and by 12 years they would have gotten the $6 billion back, but that doesn't include what the interest fees the three companies had to borrow at. It's interesting that the other two companies have already written their investment off the books, they aren't expecting any liquidation funds coming in. But I'm not sure what they will get in liquidation. It was a bad deal for Bain and for Toys R Us.

 

[dismal]

You have no idea what you're talking about. WTF does "they paid themselves first with new debt" even mean?

It's about as coherent a sentence as "Cucumber pants june-bug left wine spritzer jello shots".

They spent $1.6 Billion on the deal, and got back about $500 million in fees over the years. So on that they lost $1 billion. There interest payments were about $500 million a year and by 12 years they would have gotten the $6 billion back, but that doesn't include what the interest fees the three companies had to borrow at. It's interesting that the other two companies have already written their investment off the books, they aren't expecting any liquidation funds coming in. But I'm not sure what they will get in liquidation. It was a bad deal for Bain and for Toys R Us.

Where are you getting this info? Equity guys don't generally get those sorts of fees for doing a deal.

 

[coloradoatheist]

You have no idea what you're talking about. WTF does "they paid themselves first with new debt" even mean?

It's about as coherent a sentence as "Cucumber pants june-bug left wine spritzer jello shots".

They spent $1.6 Billion on the deal, and got back about $500 million in fees over the years. So on that they lost $1 billion. There interest payments were about $500 million a year and by 12 years they would have gotten the $6 billion back, but that doesn't include what the interest fees the three companies had to borrow at. It's interesting that the other two companies have already written their investment off the books, they aren't expecting any liquidation funds coming in. But I'm not sure what they will get in liquidation. It was a bad deal for Bain and for Toys R Us.

Where are you getting this info? Equity guys don't generally get those sorts of fees for doing a deal.

You are right. It appears the fees were $200 million.

https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#3defdfcb73b0

 

[dismal]

Where are you getting this info? Equity guys don't generally get those sorts of fees for doing a deal.

You are right. It appears the fees were $200 million.

https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#3defdfcb73b0

Hmm, $183 million in fees is still a lot. Maybe its an old school KKR thing. Most deals I see have essentially zero fees to the equity these days. In any case, $183 million in fees doesn't make you feel good about losing all your $1.28 billion investment.

 

[coloradoatheist]

Where are you getting this info? Equity guys don't generally get those sorts of fees for doing a deal.

You are right. It appears the fees were $200 million.

https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#3defdfcb73b0

Hmm, $183 million in fees is still a lot. Maybe its an old school KKR thing. Most deals I see have essentially zero fees to the equity these days. In any case, $183 million in fees doesn't make you feel good about losing all your $1.28 billion investment.

I agree. They tried to go public in 2010 but didn't work out and I guess they were just holding on as long as possible to pay off as much as they could back on their loans. No direction what they wanted to do with the company.

 

[dismal]

Hmm, $183 million in fees is still a lot. Maybe its an old school KKR thing. Most deals I see have essentially zero fees to the equity these days. In any case, $183 million in fees doesn't make you feel good about losing all your $1.28 billion investment.

I agree. They tried to go public in 2010 but didn't work out and I guess they were just holding on as long as possible to pay off as much as they could back on their loans. No direction what they wanted to do with the company.

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

 

[coloradoatheist]

Hmm, $183 million in fees is still a lot. Maybe its an old school KKR thing. Most deals I see have essentially zero fees to the equity these days. In any case, $183 million in fees doesn't make you feel good about losing all your $1.28 billion investment.

I agree. They tried to go public in 2010 but didn't work out and I guess they were just holding on as long as possible to pay off as much as they could back on their loans. No direction what they wanted to do with the company.

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

The one thing I am confused on is who gets the money in the liquidation sell? Is it the 3 companies?