Toys ‘R’ Us prepares for shutdown of its operations in America

Bloomberg

Toys “R” Us Inc. is making preparations for a liquidation of its bankrupt US operations after so far failing to find a buyer or reach a debt restructuring deal with lenders, according to people familiar with the matter.
While the situation is still fluid, a shutdown of the US division has become increasingly likely in recent days, said the people, who asked not to be identified because the information is private. Hopes are fading that a buyer will emerge to keep some of the business operating, or that lenders will agree on terms of a debt restructuring, the people said.
The toy chain’s US division entered bankruptcy in September, planning to emerge with a leaner business model and more manageable debt.
A new $3.1 billion loan was obtained to keep the stores open during the turnaround effort, but results worsened more than expected during the holidays, casting doubt on the chain’s viability.
“While a Chapter 11 bankruptcy provides a company with breathing space, it is incumbent on the debtors’ management to show how it intends to reorganize as a going concern,” said Gregory Plotko, a partner in the bankruptcy practice at Richards Kibbe & Orbe LLP. “My sense is that the major creditor group has not yet heard a compelling enough story, nor has a ‘white knight’ appeared.”

Overseas Deterioration
Bankruptcies have accelerated across the retail industry in the past two years, as chains struggle to adapt to broad consumer changes, such as the rise of e-commerce and shoppers’ shrinking budget for apparel. Claire’s Stores Inc., the fashion accessories chain with a debt load of $2 billion, is also preparing to file for bankruptcy in the coming weeks, according to people familiar with the situation. Walking Co. Holdings Inc., the seller of Birkenstocks, also filed for bankruptcy earlier this week.
For Toys “R” Us, the situation has also deteriorated for many of the retailer’s overseas divisions, which weren’t part of the bankruptcy. Its UK unit put itself in the hands of a court administrator after discussions about selling the business fell apart. Its European arm is seeking takeover bids. And talks are being held to offload the growing Asian business, the company’s most profitable arm. It’s not yet clear what will happen to the Canadian unit, which filed at the same time as the US division.
A representative for Wayne, New Jersey-based Toys “R” Us declined
to comment. The news sent shares of the biggest toymakers tumbling in early trading . Mattel Inc. fell as much as 7.6 percent, while Hasbro Inc. declined as much as 3.6 percent.
The downfall of Toys “R” Us can be traced back to a $7.5 billion leveraged buyout in 2005, when Bain Capital, KKR & Co. and Vornado Realty Trust loaded the company with debt. For years, the retailer was able to refinance its debt and delay a reckoning. But the emergence of online competitors, like Amazon.com Inc., weighed on results.
The company’s massive interest payments also sucked up resources that could have gone toward technology and improving operations.