Toys R Us Bankruptcy Caused by Hedge Fun Leveraged Buyout
by John Lawrence
It's the same old game plan for private equity firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners. They acquired the publicly traded shares of Toys R Us in a leveraged buyout during the LBO boom in 2005 in a deal valued at $6.6 billion. They funded the acquisition in large part by loading up the company with debt — hence “leveraged buyout.” Remember Mitt Romney and Bain Capital?
First the PE firm borrows the money to buy out the publicly traded shares. Then they load the company - in this case - Toys R Us with the debt. Get the Bait and Switch going on here? The PE firms borrow the money, but they are not the ones that have to pay it back. It's the company they take over that's turned into the debtor. The PE firms pay themselves handsomely out of the borrowed money. The only losers here are the employees of Toys R Us.
So here’s what the three PE firms did to Toys R Us: they stripped out cash and loaded the company up with debt. And these are the results: At the end of its fiscal year 2004, the last full year before the buyout, Toys R Us had $2.2 billion in cash, cash equivalents, and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt has surged 126%, from $2.3 billion to $5.2 billion.
This table shows the astounding results of asset stripping and overleveraging. It takes a lot of expertise and Wall Street connivance to pull this off. So whatever happens to Toys R Us, the PE firms already extracted their wild profits:
So what if then Toys R Us goes under. The PE executives already have their money. That's what a "leveraged buyout" is all about. This is exactly the same thing that happened to Hostess brands, the makers of Twinkies. Check out my article, "How Twinkies Made a Few Billionaires Richer While Thousands Lost Jobs" I wrote in February of this year. 18,000 Hostess workers lost their jobs in that LBO. The pension fund was stripped. Here's what I said:
Twinkies have been around since the 1920s. They are as American as, well, apple pie. But Twinkies parent company, Hostess, was more akin to a pinata for the rich and their penchant for financial engineering. Hostess had been bought and sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings, had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands’ union workers agreed to pay cuts and made contract concessions in exchange for equity.
The same thing that happened with Twinkies is happening to Toys R Us. The last part of the game plan didn't work however. The attempt to take Toys R Us public which would have netted the PE firms even more money failed. Investor money was not going to flow in enriching KKR, Vornado and Bain even more leaving the "public" with a turkey on its hands that would eventually go bankrupt anyway. Instead TRU went bankrupt on the PE firms' watch and now will be "restructured' which is another name for screwing the employees in order to enrich PE firms. Capitalism sucks!
And you know what? There was not a mention of the role of PE firms in the Toys R Us bankruptcy in the discussion on the NBC evening news last night. The mainstream media don't want you to know about the dirty little secrets of capitalism or global warming.