The Scheme behind the Toys "R" Us Bankruptcy

Apr 2, 2018

After filing for bankruptcy in September 2017, Toys “R” Us announced that the company is going to close all of its 730 stores in the United States, and that its stores in Europe and Canada are up for sale. The company has about 1,600 stores worldwide in 38 countries. More than 30,000 workers are threatened with losing their jobs in the U.S. alone.

According to common perception, Toys "R" Us went bankrupt because it could not compete with Amazon. Debt was, however, the real reason behind the bankruptcy.

In 2005, three "private equity" firms, Bain, KKR and Vornado paid 6.6 billion dollars to purchase Toys "R" Us. These private equity firms contributed only $1.3 billion toward this deal and paid the rest, $5.3 billion, by borrowing the money. This is a so-called "leveraged buyout" scheme in the finance industry, where the bought-out company is saddled with the loan, or debt, of the equity firms. Toys "R" Us was drowned in this debt.

Bain, KKR and Vornado charged Toys "R" Us with so-called transaction fees, totaling $362 million, before the ink was dry on the contract.

Whereas Toys "R" Us had $2.2 billion in cash and cash equivalents before the leveraged buyout, by 2017, these cash deposits had collapsed to around $300 million. Over the same period, its long-term debt skyrocketed from $2.3 billion to $5.2 billion. Toys “R” Us was required to pay more than 400 million dollars a year in interest alone on its debts, which was nearly twice the company’s annual net profit.

In spite of generating more than $11 billion in revenues, year after year, and the company’s ability to function and sell a lot of toys, the company was not able to off its debt.

Clearly, it is not competition that has strangled Toys “R” Us. It is Wall Street and its leveraging schemes.