American toy retailer Toys “R” Us has received an offer to survive threats of complete liquidation. Billionaire CEO Isaac Larian, founder and CEO of MGA Entertainment—a privately-held toy giant, has made a formal bid in the US Bankruptcy Court of $675 million to buy 275 stores in the United States. He also intends to submit a bid of $215 million for 82 stores in Canada. The 275 stores represent only a portion of the 735 locations in the US, and the 82 stores are almost all the locations in Canada. CEO Larian plans to use his own money as well as financing from banks to convert these locations into entertainment spots where families can enjoy a “mini-Disney Land” experience. Larian has both personal and strategic motives for this historical toy franchise.
This is not Larian’s first attempt to salvage Toys “R” Us as the billionaire previously launched a crowdfunding campaign with a $1 billion target via GoFundMe. He stimulated the campaign by funding $200 million of his own money along with other investors but fell short as the rescue mission only raised about $59,000 thereafter. Larian understood that the crowdfunding was a long shot, and it was more of a cause to raise awareness. Larian also has personal ties as he founded and grew his toy company to the titanic level it is today and as he would not want to see a traditional American toy retailer go out of business. Larian said, “the prospect of bringing the Toys ‘R’ Us experience to a new generation, my new grandson’s generation, is enough to motivate me to save Toys ‘R’ Us.” Moreover, MGA Entertainment is not the only investor that is interested in this multinational corporation. The Asian business of the toy distributor has received formal bids totaling over $1 billion for a majority stake. Bankruptcy lawyer Joshua Sussberg of Kirkland & Ellis claimed that the Asian businesses and the Central European businesses are strong and healthy, and that further assessment must be conducted to see if the bids properly reflect the fundamental values. In terms of the market, Larian believes the liquidation of the retail giant will have a long-term effect on the toy market. The demise of the company puts more than 30,000 jobs at stake for a company with $5 billion in debt. Regardless of the motives, investors recognize the value Toys “R” Us could provide whether that is an asset value or a brand value.
MGA Entertainment see potential in keeping Toys “R” Us alive. This acquisition would be a vertical integration. Vertical integration is a strategy where a company expands its operations into multiple parts of the production line—i.e. a manufacturer purchasing its supplier and/or distributor. Toys “R” us accounts for about 20% of its toys, and this acquisition will provide MGA Entertainment with more control over its distribution network as well as its competitor. Although the acquisition appears to be fundamentally sound, there are also potential pitfalls: significant debt and strong competition. Part of the fall of the retailer is due to a leveraged buy-out (LBO). A leveraged buy-out is when a financial sponsor (typically a private equity firm) purchases a company using significant amounts of borrowed funds. The use of borrowed funds will exponentially raise returns, but, if unsuccessful, will exponentially raise loss as well. This explains the significant amount of debt accumulated over the years. Another growing concern, is the shift in consumer behavior. Innovation and convenience of e-commerce and online retail has caused a major strain in traditional retail stores. Toys “R” Us is one of many big-name retailers who have suffered from Amazon’s dominant presence.
As a business owner, it is essential to change accordingly with your consumer/demand and your competition. Acquisition of your competitors to establish a distribution network can improve production efficiency, but it is difficult to turn a profit if you compete in a dying industry such as the retail market. Furthermore, it is important to sustain a healthy level of cash flow in your business to buy more profit-generating assets and to cover any short-term and long-term debt.