Toys “R” Us buyout firms offer crumbs for holidays

US$20 million won’t go far amongst thousands of workers: Opinion
By Lauren Silva Laughlin
||Last Updated: 11/23/2018
Toys R Us
Closing down signs are seen outside the Toys "R" Us store in Liverpool, Britain, on March 19. REUTERS/Phil Noble

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

DALLAS (Reuters Breakingviews) — Toys “R” Us’s former owners are offering some crumbs for the holidays. KKR and Bain Capital, the buyout firms that effectively ran the retailer into the ground, are giving $20 million (all figures U.S.) to employees who lost jobs in its bankruptcy.

That’s better than nothing, and an intriguing precedent for private equity. But it won’t go far among the tens of thousands of workers affected.

It’s also a pittance compared with the fees the firms took over the years.

KKR and its partners, which also included real estate manager Vornado Realty Trust, slathered debt on Toys R Us in their $6.6 billion leveraged buyout in 2005.

That made it harder for the company to respond to the deep recession of 2008 and 2009, and the structural threat posed by online retailers like Amazon.

When it filed for bankruptcy last year with more than $5 billion in debt, creditors quickly decided to liquidate the company’s U.S. assets. Some 65,000 employees found their jobs at risk.

Pressure quickly mounted on the firms to explain themselves. In July a group of 19 Congressional representatives sent a letter criticizing the firms for fees they extracted from the retailer and asking questions about their heavy use of debt.

Employees pressured various public pension funds that invested with the private equity groups to urge them to provide assistance.

The new employee fund offers KKR and Bain Capital a way to salvage some of their reputations.

It can’t have been an easy decision. By tacitly accepting some responsibility for employees, it sets a difficult precedent for the private-equity industry generally.

And to be fair, the firms saw virtually all of their $1.3 billion equity investment in Toys wiped out.

But they also managed to extract some $350 million in fees from the company over the years, including a hefty $81 million back in 2005 when the acquisition closed. Much of that went back to their own investors, but the cash drain didn’t help the company.

And it makes the $20 million — or roughly $600 per worker assuming half those employed at the time of the bankruptcy meet the guidelines for a payout — look like a sorry consolation.

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