PE-backed Toys “R” Us Ensnared In Anti-Trust Probe

A handful of blue-chip private equity firms have gotten caught up in anti-trust investigation, although not the kind the industry feared regulators would pursue a few years ago.

Federal antitrust regulators are investigating whether Toys “R” Us Inc. flexed its muscles to curb discounting by retailers so consumers would have to pay a higher price, the Wall Street Journal reported Oct. 17. Toys “R” Us is owned by Bain Capital, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust. The investigation is also expected to include Britax Childcare, a U.K.-based maker of child seats and other child safety products that is owned by The Carlyle Group.

It is unclear what role the private equity firms that own the companies will play in the investigation, which is being conducted by the Federal Trade Commission. Officials at the FTC, as well as executives at the private equity firms, either declined to comment or could not be reached. However a source at one of the firms said it had not been contacted by any authorities regarding the investigation.

Investigators are expected to review e-mails in which an executive at Toys “R” Us subsidiary Babies “R” Us appears to urge an official at Britax Childcare to get Target Corp. to raise its prices on Britax products. “Did Target commit to you when they will raise their prices,” Cesar Garcia, director of merchandising at Babies “R” Us, allegedly asked in an e-mail dated Jan. 6, 2006, according to the Journal. A few hours later, Scott Doerstling, a Britax representative at the time, allegedly responded: “Target said they would honor the new [Manufacturer Suggested Retail Price]…please be assured that Britax’s goal is to have uniform MSRPs in the market place.”

Bain Capital, KKR and Vornado bought the international toy store chain in July 2006 for $6.6 billion. Carlyle bought Britax in October 2005 for $424 million. Babies “R” Us sells several types of Britax car seats and strollers.

This isn’t the first time Toys “R” Us has run into trouble related to anti-competitive tactics. In 1998 the company consented to an order from the FTC after an administrative law judge ruled that the retailer pressured toy makers into boycotting Costco Wholesale Corp. and other discount warehouse clubs by threatening to stop selling any toys also being sold by those clubs, according to the Wall Street Journal.

For the private equity firms involved and for the industry at large, the investigation marks an uncomfortable reminder of the Department of Justice’s interest in whether buyout shops were working together on club deals (such as Toys “R” Us) in anti-competitive ways to depress the value of the companies they bought. The Justice Department made some initial inquiries into the question back in October 2006, but any investigation seemed to dissipate as club deals became less popular.