Did Wall Street Destroy Toys “R” Us?

Did Wall Street Destroy Toys “R” Us?
This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.

Did Wall Street destroy Toys “R” Us? Are hedge funds the reason the company had to shut down completely? We talk about all that and more in the video above!

The death of Toys “R” Us by Wall Street was a two part process. First the private equity funds had their turn. And then the hedge funds came in to finish the job.

Back in 2005, Toys was struggling against competitors like Target and Walmart. And of course, this was also the time that Amazon was growing into a powerhouse. During this time, two private equity firms — KKR and Bain — and one real estate company — Vornado — decided to take the company private. They pushed through a leveraged buyout and took the Toys private for $6.6 billion.

A leveraged buyout or LBO, is when an acquirer takes out a bunch of debt to buy a company and uses the target company’s assets as collateral. The debt is put on the target company’s balance sheet and gets serviced by that company’s cash flows. The PE firms still put in equity of their own, but most of the transaction if funded by debt. This method was very popular in the 80’s, in Wall Street’s heyday. Hostile takeovers involved these LBO’s.

After the LBO Toys “R” Us had $5.3 billion worth of debt. They had nearly $6 billion in total interest payments, shelling out $400 million a year to service it.

To learn more, make sure you watch the video above!

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