Private Equity Fucks Toys R Us

[Jimmy Higgins]

Bankrupt Toys 'R' Us Inc is preparing to sell or close all 885 stores in its U.S. chain, risking up to 33,000 jobs, after failing to reach a deal to restructure billions of dollars in debt, a person familiar with the matter said on Wednesday.

...

With shoppers flocking to online platforms like Amazon.com Inc (AMZN.O) and children choosing electronic gadgets over toys, Toys 'R' Us has struggled to service debt from a $6.6 billion leveraged buyout by private equity firms KKR & Co LP (KKR.N) and Bain Capital and real estate investor Vornado Realty Trust (VNO.N) in 2005.

Used money they didn't have to buy a company.

Yes, yes, retail has been struggling because of Walmarts, Targets, and Amazons.

Here is the thing. In 2016, Toys R Us made $460 million in pre-tax profit. So ummm...

... I know I know, I'm just an engineer, so I guess I'm okay with math, and it makes me wonder, how does a company that made $460 million in pre-tax profit from over $11 billion sales... go bankrupt?

There is the small thing about the $457 million in interest for the year.

Yeah, spending money you don't have to buy a company... and destroy it because of the debt you acquired to buy... not because of the company itself. Gillette and Hicks royally fucked up the finances of Liverpool FC with their leveraged buyout.

In 2003, Toys R Us had $262 million pre-tax profit, and interest of $142 million. See, making money. Now, the toy business is rough with Walmart and Target and Moodys and the like were cautious about the credit rating of Toys R Us which was Ba1 in 2004. Not great, but certainly a lot better than what is coming up.

Then almost immediately after the acquisition, Moody's slashed Toys R Us rating.

Moody's Investors Service downgraded the corporate family rating of Toys "R" Us, Inc. to B1, the senior unsecured notes rating to B3, and the Speculative Grade Liquidity Rating to SGL-2, and left all ratings on review for possible further downgrade. These actions result from the significant increase in leverage as a result of the July 21, 2005 closing of the acquisition of Toys "R" Us, Inc. by a consortium consisting of Kohlberg Kravis Roberts & Co. ("KKR"), Bain Capital Partners LLC ("Bain"), and Vornado Realty Trust ("Vornado") for $6.6 billion plus the assumption of debt.

By 2006 with more downgrades, their interest expenses tripled, and began the royally fucking that would doom the company. Not Walmart, Target, and Amazon, but reckless debt.

 

[Axulus]

$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.

 

[Harry Bosch]

Bankrupt Toys 'R' Us Inc is preparing to sell or close all 885 stores in its U.S. chain, risking up to 33,000 jobs, after failing to reach a deal to restructure billions of dollars in debt, a person familiar with the matter said on Wednesday.

...

With shoppers flocking to online platforms like Amazon.com Inc (AMZN.O) and children choosing electronic gadgets over toys, Toys 'R' Us has struggled to service debt from a $6.6 billion leveraged buyout by private equity firms KKR & Co LP (KKR.N) and Bain Capital and real estate investor Vornado Realty Trust (VNO.N) in 2005.

Used money they didn't have to buy a company.

Yes, yes, retail has been struggling because of Walmarts, Targets, and Amazons.

Here is the thing. In 2016, Toys R Us made $460 million in pre-tax profit. So ummm...

... I know I know, I'm just an engineer, so I guess I'm okay with math, and it makes me wonder, how does a company that made $460 million in pre-tax profit from over $11 billion sales... go bankrupt?

There is the small thing about the $457 million in interest for the year.

Yeah, spending money you don't have to buy a company... and destroy it because of the debt you acquired to buy... not because of the company itself. Gillette and Hicks royally fucked up the finances of Liverpool FC with their leveraged buyout.

In 2003, Toys R Us had $262 million pre-tax profit, and interest of $142 million. See, making money. Now, the toy business is rough with Walmart and Target and Moodys and the like were cautious about the credit rating of Toys R Us which was Ba1 in 2004. Not great, but certainly a lot better than what is coming up.

Then almost immediately after the acquisition, Moody's slashed Toys R Us rating.

Moody's Investors Service downgraded the corporate family rating of Toys "R" Us, Inc. to B1, the senior unsecured notes rating to B3, and the Speculative Grade Liquidity Rating to SGL-2, and left all ratings on review for possible further downgrade. These actions result from the significant increase in leverage as a result of the July 21, 2005 closing of the acquisition of Toys "R" Us, Inc. by a consortium consisting of Kohlberg Kravis Roberts & Co. ("KKR"), Bain Capital Partners LLC ("Bain"), and Vornado Realty Trust ("Vornado") for $6.6 billion plus the assumption of debt.

By 2006 with more downgrades, their interest expenses tripled, and began the royally fucking that would doom the company. Not Walmart, Target, and Amazon, but reckless debt.

Their pre-tax profit or operating profit didn't cover their debt service. They tried to negotiate with their lenders. The negotiations were leaked out, suppliers got wind, suppliers got scared, suppliers demanded quicker terms. A retail store can't remain in business if their suppliers cut them off.

 

[Jimmy Higgins]

$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.

I gave you links. Their trouble is the debt costs increased substantially because the people that bought Toys R Us did so with other people's money and the rating agencies didn't trust their ability to pay it back.

 

[Playball40]

Private Equity fucked iHeart Radio too.

 

[Axulus]

$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.

I gave you links. Their trouble is the debt costs increased substantially because the people that bought Toys R Us did so with other people's money and the rating agencies didn't trust their ability to pay it back.

Debt vs equity matters very little in a decision to liquidate. If the return on assets is sufficient (at or above above average), the debt holders will renegotiate because the liquidated assets will provide a worse return (lower payoff of the debt). If the return on assets is well below average, liquidation is inevitable because that means those assets can be redeployed for a higher return elsewhere (bondholders get paid more).

Note that this would also be true if debt were zero. Stock holders would prefer to liquidate if return on assets is well below average (stockholders get paid more by liquidating). Financing structure has almost no impact on whether it makes sense to liquidate or not. It is all about return on assets vs asset liquidation value vs return on assets if put to a different use.

Note that the suppliers are pulling out. Not only do the suppliers think the bondholders might be paid zero, they are worried there will be so little cash in the future that not even they will be fully paid. Suppliers get paid before the bondholders. This means the suppliers are worried that return on assets will be _negative_. A sure sign that the assets can be better deployed to a better use (just sticking cash in a bank account guarantees a positive return, for example).

 

[Axulus]

You both seem to suffer from the ignorance that a company just needs to make an accounting profit to be viable (defined as operating profit before debt service) and therefore an increase in debt service is what is responsible for a company deciding to liquidate. Not so.

The operating profit can be sufficiently low that redeploying liquidated assets elsewhere will earn a higher profit. This is because the amount of assets deployed vs the amount of profit earned is crucially relevant. Not just any amount of profit will do. Even cash put into a bank account will earn something.

If the statement that the liquidated assets will earn a higher return if redeployed elsewhere is true, the company should liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so.

If this statement is false, the company should not liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so (boldbolders will renegotiate so as to get paid more than they would receive under a liquidation event).

Prove that this statement is false for Toys R Us. I have seen no attempt at serious analysis, just a knee jerk "blame private equity" tribal mantra despite no real knowledge of how business and the economy actually works.

 

[Jimmy Higgins]

$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.

I gave you links. Their trouble is the debt costs increased substantially because the people that bought Toys R Us did so with other people's money and the rating agencies didn't trust their ability to pay it back.

Debt vs equity matters very little in a decision to liquidate.

If Toys R Us is making a profit, you don't need to liquidate. They aren't making a profit because their lending costs are through the roof because these idiots acquired the company with about $5 billion of debt.

All you other talk is just smoke screening the underlying cause to this problem. The acquisition was not a sustainable plan. Toys R Us did $11.5 billion in sales, and before tax profit of over $400 million. You have to be fucking things up badly to turn a $460 million profit into a loss.

 

[Axulus]

Debt vs equity matters very little in a decision to liquidate.

If Toys R Us is making a profit, you don't need to liquidate. They aren't making a profit because their lending costs are through the roof because these idiots acquired the company with about $5 billion of debt.

All you other talk is just smoke screening the underlying cause to this problem. The acquisition was not a sustainable plan. Toys R Us did $11.5 billion in sales, and before tax profit of over $400 million. You have to be fucking things up badly to turn a $460 million profit into a loss.

Liquidation could be more profitable than earning a sufficiently low return on assets. This is because it is possible to earn a higher profit by using the assets for something else. If debt were zero, stockholders should vote to liquidate if this statement is true.

A simple example: if your bank account is only earning you a .1% return on your savings, and the bank next door is offering a 1% return, you should liquidate and reinvest, no matter whether you have $0 in credit card debt or $10,000.

You have provided zero information that liquidation will provide a lower return on assets than remaining in business, nor that debt service has any relevance to return on assets or the decision to liquidate.

 

[Playball40]

You're funny. Actually I have an accounting degree so am well aware of "how business works" and iHeartMedia (Clear Channel) is a client so I've been in the trenches with them since shortly after their "bailout". So yeah, I DO know what I'm talking about and it is clearly more than you.

You both seem to suffer from the ignorance that a company just needs to make an accounting profit to be viable (defined as operating profit before debt service) and therefore an increase in debt service is what is responsible for a company deciding to liquidate. Not so.

The operating profit can be sufficiently low that redeploying liquidated assets elsewhere will earn a higher profit. This is because the amount of assets deployed vs the amount of profit earned is crucially relevant. Not just any amount of profit will do. Even cash put into a bank account will earn something.

If the statement that the liquidated assets will earn a higher return if redeployed elsewhere is true, the company should liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so.

If this statement is false, the company should not liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so (boldbolders will renegotiate so as to get paid more than they would receive under a liquidation event).

Prove that this statement is false for Toys R Us. I have seen no attempt at serious analysis, just a knee jerk "blame private equity" tribal mantra despite no real knowledge of how business and the economy actually works.

 

[dismal]

... I know I know, I'm just an engineer, so I guess I'm okay with math, and it makes me wonder, how does a company that made $460 million in pre-tax profit from over $11 billion sales... go bankrupt?

There is the small thing about the $457 million in interest for the year.

Wow, if only there were some sort of "Bankruptcy Restructuring Process" we had to get profitable assets out from under burdensome capital structures.

Maybe the bankruptcy code needs an 11th chapter.

 

[Axulus]

You're funny. Actually I have an accounting degree so am well aware of "how business works" and iHeartMedia (Clear Channel) is a client so I've been in the trenches with them since shortly after their "bailout". So yeah, I DO know what I'm talking about and it is clearly more than you.

You both seem to suffer from the ignorance that a company just needs to make an accounting profit to be viable (defined as operating profit before debt service) and therefore an increase in debt service is what is responsible for a company deciding to liquidate. Not so.

The operating profit can be sufficiently low that redeploying liquidated assets elsewhere will earn a higher profit. This is because the amount of assets deployed vs the amount of profit earned is crucially relevant. Not just any amount of profit will do. Even cash put into a bank account will earn something.

If the statement that the liquidated assets will earn a higher return if redeployed elsewhere is true, the company should liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so.

If this statement is false, the company should not liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so (boldbolders will renegotiate so as to get paid more than they would receive under a liquidation event).

Prove that this statement is false for Toys R Us. I have seen no attempt at serious analysis, just a knee jerk "blame private equity" tribal mantra despite no real knowledge of how business and the economy actually works.

Lol, so is iHeartMedia going to generate more money by liquidating than remaining in business or not? Or are the bondholders masochistic and choosing to get paid less by liquidating compared to remaining in business? Or are you simply mistaken in your analysis?

A company either generates more cash (net present value when talking about future cash flows) by remaining in business or by liquidating. Capital structure is nearly irrelevant to this fact. If debt service is very high but the company will generate more cash by remaining in business than by liquidating, then the bondholders will renegotiate debt terms and allow the company to continue operating because they will get paid more that way.

The reverse is also true. If the company has zero debt but will generate more money by liquidating than by remaining in business (even if slightly profitable), then the stockholders will choose to liquidate because they get paid more.

Simple realities of business.

 

[Jimmy Higgins]

Debt vs equity matters very little in a decision to liquidate.

If Toys R Us is making a profit, you don't need to liquidate. They aren't making a profit because their lending costs are through the roof because these idiots acquired the company with about $5 billion of debt.

All you other talk is just smoke screening the underlying cause to this problem. The acquisition was not a sustainable plan. Toys R Us did $11.5 billion in sales, and before tax profit of over $400 million. You have to be fucking things up badly to turn a $460 million profit into a loss.

Liquidation could be more profitable than earning a sufficiently low return on assets. This is because it is possible to earn a higher profit by using the assets for something else.

Deer A: What in the heck are you doing?
Deer B: I'm liquidating myself. My value has increased to nature.
Deer A: But you are being eaten by vultures and will die.
Deer B: My realized value has never been higher!

 

[Jon Osterman]

I suppose it depends on what you value. Which is more important - the profits of shareholders and investors or the jobs and lives of thousands of employees?

I think Axulus is correct on the analysis of this situation but it really does emphasise why raw unregulated capitalism is really fucking up our society.

 

[Jimmy Higgins]

I suppose it depends on what you value. Which is more important - the profits of shareholders and investors or the jobs and lives of thousands of employees?

I think Axulus is correct on the analysis of this situation but it really does emphasise why raw unregulated capitalism is really fucking up our society.

I wouldn't say completely unregulated, as part of the deal, the private equity firms still had to file with the SEC, presumably because of the debt involved.

 

[Axulus]

I suppose it depends on what you value. Which is more important - the profits of shareholders and investors or the jobs and lives of thousands of employees?

I think Axulus is correct on the analysis of this situation but it really does emphasise why raw unregulated capitalism is really fucking up our society.

And how do you figure that the employees continuing to work for Toys R Us is to the greatest benefit for society (employees included), vs those employees doing something else? How do you figure that society is better served having that many people selling toys?

If we had your attitude, the economy would stagnate. We'd still be protecting the jobs of candle makers and buggy whip manufacturers (or perhaps steel, aluminum, and coal jobs, as Trump is so concerned about).

 

[Tom Sawyer]

I suppose it depends on what you value. Which is more important - the profits of shareholders and investors or the jobs and lives of thousands of employees?

I think Axulus is correct on the analysis of this situation but it really does emphasise why raw unregulated capitalism is really fucking up our society.

And how do you figure that the employees continuing to work for Toys R Us is to the greatest benefit for society (employees included), vs those employees doing something else? How do you figure that society is better served having that many people selling toys?

If we had your attitude, the economy would stagnate. We'd still be protecting the jobs of candle makers and buggy whip manufacturers (or perhaps steel, aluminum, and coal jobs, as Trump is so concerned about).

I suppose the response of "Because those employees generate hundreds of millions of dollars in profits from doing that work" is too obvious.

 

[Playball40]

You can google if you really want to know the pre-authorized restructuring deal. I gave you no analysis only that I know the history and although fragmented and in need of centralization, the radio/media industry was and is profitable.

You're funny. Actually I have an accounting degree so am well aware of "how business works" and iHeartMedia (Clear Channel) is a client so I've been in the trenches with them since shortly after their "bailout". So yeah, I DO know what I'm talking about and it is clearly more than you.

You both seem to suffer from the ignorance that a company just needs to make an accounting profit to be viable (defined as operating profit before debt service) and therefore an increase in debt service is what is responsible for a company deciding to liquidate. Not so.

The operating profit can be sufficiently low that redeploying liquidated assets elsewhere will earn a higher profit. This is because the amount of assets deployed vs the amount of profit earned is crucially relevant. Not just any amount of profit will do. Even cash put into a bank account will earn something.

If the statement that the liquidated assets will earn a higher return if redeployed elsewhere is true, the company should liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so.

If this statement is false, the company should not liquidate whether debt is zero or debt is sky high. Both bondholders and stockholders will maximize their return by doing so (boldbolders will renegotiate so as to get paid more than they would receive under a liquidation event).

Prove that this statement is false for Toys R Us. I have seen no attempt at serious analysis, just a knee jerk "blame private equity" tribal mantra despite no real knowledge of how business and the economy actually works.

Lol, so is iHeartMedia going to generate more money by liquidating than remaining in business or not? Or are the bondholders masochistic and choosing to get paid less by liquidating compared to remaining in business? Or are you simply mistaken in your analysis?

A company either generates more cash (net present value when talking about future cash flows) by remaining in business or by liquidating. Capital structure is nearly irrelevant to this fact. If debt service is very high but the company will generate more cash by remaining in business than by liquidating, then the bondholders will renegotiate debt terms and allow the company to continue operating because they will get paid more that way.

The reverse is also true. If the company has zero debt but will generate more money by liquidating than by remaining in business (even if slightly profitable), then the stockholders will choose to liquidate because they get paid more.

Simple realities of business.

 

[dismal]

I suppose it depends on what you value. Which is more important - the profits of shareholders and investors or the jobs and lives of thousands of employees?

I think Axulus is correct on the analysis of this situation but it really does emphasise why raw unregulated capitalism is really fucking up our society.

We know what greedy ruthless capitalists value - return on their investments. If you are a debt holder who suddenly finds yourself in control over a toy store your goal is 1) to get as much money from it as possible and 2) there is no #2.

So, you ask yourself should I a) operate it, b) sell it to someone who wants to operate it (in actuality sell it to the highest bidder regardless of what they want to do with it) or c) liquidate it.

If the answer comes back "c) liquidate it" think about what that means. That asset must not be creating much value in its current use. In the case of a toy store, it means I am willing to sell the inventory at some fire sale price and eat all the other sunk costs so I can have some bricks and mortar real estate to sell. That real estate may be worth more than the ongoing business. Perhaps it is prime retail real estate that would be worth being deployed into some other use. The whole process directs valuable assets to better meeting human wants and needs. This is called "progress".

Time for the speech:

[YOUTUBE]62kxPyNZF3Q[/YOUTUBE]

 

[Horatio Parker]

In the past, CFIUS has blocked several Huawei attempts to purchase U.S. tech companies because they would have involved the transfer of security-related technology to a company that CFIUS[Treasury's Committee on Foreign Investment in the United States] has demonstrated has ties to the Chinese military. CFIUS—an interagency committee headed by the Treasury Department, but also consisting of more than a dozen departments and agencies, ranging from Defense to Commerce—is in the business of ruling on potential foreign purchases of U.S. companies that have national security implications. Tuesday’s ruling was groundbreaking in that the issue wasn’t whether Singapore’s Broadcom itself posed a security risk by favoring the Chinese—nothing in the CFIUS letter even hinted at that—but rather, that the purchase might simply reduce Qualcomm’s capacity to conduct high-end research, thereby enabling Huawei and the Chinese to develop advanced technology before we do, which could give them a military advantage.

But why would Qualcomm’s purchase by Broadcom diminish Qualcomm’s commitment to research? This is the gobsmacking part of the CFIUS letter.
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Because, in the words of the letter, “Broadcom’s statements indicate that it is looking to take a ‘private-equity’-style direction if it acquires Qualcomm, which means reducing long-term investment, such as R&D, and focusing on short-term profitability.”

http://prospect.org/article/nationa...ken-private-equity-ownership-imperils-america