After almost one year, Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty have completed their $6.6 billion cash acquisition of Toys R’ Us, in a deal that will likely be the largest LBO of this quarter. According to reports, there was a $2.2 billion assumption of debt, that brings the total transaction value to $8.8 billion. As a result of this sale, Toys R’ Us will become a privately held company for the first time since it went public in 1978.
The three firms will all have equal stakes in the company, and, according to market pros, each will bring something to the table in its ownership. KKR brings financial structuring, Vornado will make sense of the company’s vast real estate holdings and Bain is well versed in the turnaround and is no stranger to the toy industry, as it once was an investor in KB Toys.
The decision to put the company up for sale originated almost a year ago as a result of the company’s disappointing financial performance. Originally, Toys R’ Us executives wanted to only sell off the toy division of the company, but as investors got wind of the sale, bids started to pour in for both Toys R’ Us and for the Babies R’ Us franchise. Babies R’ Us has been growing steadily and has generated a significant cash flow since its first store opened in the mid-1990s.
Though there were other bidders, in the end, the auction really pinned the KKR, Bain and Vornado consortium up against Cerberus Capital Management, Goldman Sachs and Kimco Realty. Reports in early March had said Cerberus, Goldman and Kimco kicked off the bidding with a $5 billion offer.
With the deal finally closed, KKR, Bain and Vornado are ready to make some changes. First up, executive management is expected to be changed, as former Toys R’ Us Chief Executive Officer John Eyle and former Chief Operating Officer, Christopher Kay, have both stepped down. Richard Markee, president of the Babies R’ Us division, will serve as interim CEO until a replacement is found.
Despite some personnel changes, it is unclear how the consortium will address Toys R’ Us’ lingering problem of being out-priced by discount stores like Wal-Mart. None of the firms would comment on the company’s future competitive plans.
Toys R’ Us was founded by Charles Lazarus in 1948, and he opened the first toy supermarket in 1957. There are currently about 1,300 Toys R’ us stores and 220 Babies R’ Us stores being operated worldwide.