$400 million annual debt paydown commitment hurt its chances to compete with Amazon
From the Boston Business Journal
Boston-based private equity firm Bain Capital is one of the three owners of Toys “R” Us poised to take a hit on their 12-year-old investment now that the toy chain has declared bankruptcy.
Bain, fellow private equity giant KKR & Co. LLP (NYSE: KKR) and real estate investment firm Vornado Realty Trust (NYSE: VNO) took Toys “R” Us private in 2005 in a $6.6 billion deal. The trio paid $1.3 billion in cash in total, with the remainder financed by debt.
Toys “R” Us has reserved roughly $400 million a year to pay down its debt, a major handicap in its competition with Amazon.com Inc. (Nasdaq: AMZN) and other online retailers. Those obligations helped to keep the company’s stores less-than-sparkling and prevented it from offering expedited shipping options and a subscription-based delivery service, CEO David Brandon said in a bankruptcy court filing on Tuesday.
The investment has appeared a loser for Bain, KKR and Vornado for some time. Since Bain is privately held, there’s little information about how the firm viewed its investment. However, publicly traded Vornado indicated in a securities filing prior to the bankruptcy that it had written down its $428 million slice of the investment to zero. Bain, KKR and Vornado each own a 32.5 percent share of the company.
The three firms had hoped to exit the investment through an initial public offering. Toys “R” Us filed preliminary paperwork to go public in 2010 but the plans sat on the shelf for years. The company finally pulled the plans in 2013, on the same day it reported a drop in net sales and earnings for the fiscal year.
Other retail investments have proven more successful for Bain. Michaels, which the private equity firm and Blackstone Group acquired in 2006, went public in 2014. Burlington Coat Factory, also purchased in 2006, had a 2013 IPO.
The investment is not a total loss for Bain. For instance, Toys “R” Us has paid management and advisory fees to Bain, KKR and Vornado every year, though those payments have fallen of late: They totaled $6 million in the fiscal year that ended in January, compared with $22 million three years prior.
Toys “R” Us also became a customer of other Bain portfolio companies, including warranty service provider SquareTrade and distributor Veritiv.
The two Bain veterans who sat on the toy retailer’s board were Bain co-chairman Joshua Bekenstein and senior advisor Matt Levin.
