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LEVERAGE BUYOUT
TAM NGUYEN, ROBERT ALI
TABLE OF CONTENTS
Contents
Executive Summary______________________________________________________________1
Company Overview______________________________________________________________2
Market Overview_________________________________________________________________3
Investment Thesis________________________________________________________________4
Valuation_________________________________________________________________________5
Investment Risks_______________________________________________________________17
Conclusion______________________________________________________________________18
CONCLUSIONCONCLUSION
Executive Summary
STRATEGIC HIGHLIGHTS
FINANCIAL HIGHLIGHTS
The Company agreed to sell the global operations to the consortium of Kohlberg, Kravis &
Roberts (KKR), Bain Capital Partners and Vornado Realty Trust at $26.75 per share for a
$6.7B transaction. This equated to a 122.5% premium over stock price.
OPERATING HIGHLIGHTS
In accordance to the above bid proposed by the consortium, John H. Eyler, Jr. (chairman,
CEO, and president of Toys R Us) and Christopher K. Kay (executive vice president and
chief operations officer) were to leave. Richard L. Markee (originally the president of
Babies R Us) was appointed as interim CEO. It was expected that Markee would appoint
his own management team in time.
LOOKING AHEAD
Both further understanding the industry downturn and forecasting the future of the
company and industry is essential. An emphasis will be out on focusing on the company's
real estate portfolio, financial engineering, and valuation of real estate.
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CONCLUSIONCONCLUSION
Company Overview
STRENGTH
As of January 29, 2005, Toy R Us operated nearly 1,500 superstores worldwide. This
includes 681 toy stores and 217 Babies R Us stores in the United States and more
than 600 international stores. In addition, Toy R Us also markets successfully on Web
and builds a strong partnership with Amazon. By having a huge distribution network
that benefits from advanced logistic system, it possesses a significant market share as
well as a strong bargain position with manufacturers
WEAKNESS
However, Toy R Us has no single and sustainable competitive advantage, other than
brand. In the US, Toy R lost its number one positions as toy retailer to the
mass/discount channel such as Walmart and Target.
As with all retailers in toy industry, Toy R Us is heavily dependent upon successful sales
during the final quarter of the year. If they dont do well in Christmas, their profit will be
significantly impacted
OPPORTUNITIES
Toy R Us has a lot of opportunities for joint venture and strategic alliances. By
focusing on developing its online business, Toy R Us can not only improve its
shopping experience but also reduce its inventory risks. The fact that sale per store has
declined in recent year while online toy sales continued to increase strongly support Toy
R Us new direction to improve its margin.
The rise of European traditional toy sales in recent year also opens a great opportunity
for Toy R Us in international market. Since the citizens of emerging nations such as
China and India are getting wealthier and better educated, they are willing to spend
more in these types of goods and services. Through marketing aggressively overseas,
Toy R Us can successfully gain a big market share in these countries.
THREAT
The dollar sales in the industry declined for a third consecutive year and traditional toys
and games continuously lost its market. Analysts and industry experts in 2005 predicts
0 to 2 percent growth in this category over next five years.
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CONCLUSIONCONCLUSION
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CONCLUSIONCONCLUSION
Market Overview
CHANGING DEMAND IN TRADITIONAL TOY SEGMENT
Video game sales continued to outperform traditional toy sales in 2005 as younger
children increasingly chose video games over traditional.
0 to 2 percent growth in the traditional toys and games market over the next three to
five years
European market outperform the United States market with increasing demand for
increased demand for infant/preschool toys, building sets, and action figures.
The U.S. market for infant, toddler, and preschool products was approximately $34
billion in 2005
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CONCLUSIONCONCLUSION
Investment Thesis
A STABLE CASH FLOW
Although the growth has been stagnant in recent years, Toy R Us still successfully
maintains a stable cash flow in the historical income statement.
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CONCLUSIONCONCLUSION
Valuation
TRANSACTION OVERVIEW
In this case study, we will analyze three scenarios to compare the impact of different
factors on EBITDA Multiple and Return Ratio.
BASE CASE
First, in the base case, as the growth of traditional toys and games market is about 0 2 %
and current trend in this market, we decide to set zero growth for Toy R Us domestic
segment. Similarly, based on the recent performance in international market, we choose
3% growth for Toy R Us international segment. For Babies R Us segment, it is still new
and has a lot of room to grow. However, because of recent economic factors, we also
choose a conservative growth of 3% for this segment. Finally, even though Toy R Us
business have many potential growth, it still required a lot of work. Thats why we set 0%
for this segment.
Based on these assumptions, we start building projected sale and EBITDA for these four
main segments:
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CONCLUSIONCONCLUSION
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CONCLUSIONCONCLUSION
Consolidated Summary
Return Summary
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CONCLUSIONCONCLUSION
The result shows that if we choose to exit at 8.00x multiple, we can gain of $395.3 million
or 5.5% return on equity. Since this multiple is reasonable in comparison with 8.6x multiple
of other deals during this time, we should take this deal.
UPSIDE CASE
In the upside case, while we choose only 1% projected growth for Toy R Us Domestic and
ToyRUs.com, we decide to increase the growth of Toy R International and Babies R Us to
5% due to its potential opportunity as well as the current market trend.
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CONCLUSIONCONCLUSION
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CONCLUSIONCONCLUSION
Consolidated Summary
Return Summary
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CONCLUSIONCONCLUSION
By using higher growth to build the model, we realize even higher gain of $998.1 million or
12.1% return on equity with 8.00x EBITDA multiple.
DOWNSIDE CASE
In the downside case, we decide to keep the growth of Toy R Us International and Babies
R Us at 0% and reduce the projected growth for Toy R Domestic and ToyRUs.com to -1%
due to the unstable cash flow of these two segments as well as the changing demand
toward babys products.
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CONCLUSIONCONCLUSION
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CONCLUSIONCONCLUSION
Consolidated Summary
Return Summary
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CONCLUSIONCONCLUSION
Modifying the growth of several segments obviously creates a strong impact on our return.
After 5 years, if we decide to sell the target at 8.00x EBITDA multiple, we will realize a loss
of $380.2 million or -6.7% return on equity.
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CONCLUSIONCONCLUSION
CURRENT BALANCE SHEET
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CONCLUSIONCONCLUSION
CURRENT FINANCIAL PERFORMANCE
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CONCLUSIONCONCLUSION
Investment Risks
The major concern for investment risks is the lack of growth in the industry relating to
specialized toy stores. There has been a steady decline in the demand for traditional toys,
such as action figures. Children have instead been demanding, at earlier ages, video
games (age compression). Therefore, the traditional toy market only realized growth, in
the past few years, solely in the under 5 years old age category. The toy industry is also
highly affected by seasonal sales.
Furthermore, sales of Toys R Us in the United States and international has steadily
declined since 2003. Babies R Us has also declined but remains slightly more stable due
to an increased population of children less than 5 years of age.
In 2003-2004 Toys R Us prospects was hurt by increased competition in the toy industry,
especially from discount and mass merchandisers, such as Walmart and Target. These
competitors had more substantial financial resources and lower operating expenses than
Toys R Us. Due to the above complications, the company was forced to close all 146 of
freestanding Kids R Us stores between 2003-2005.
Toys R Us consolidated net sales also decreased by 1.9% to $11.1 billion in the fiscal year
end January 29, 2005, from $11.3 billion in the fiscal year end January 31, 2004. This
decline in net sales primarily stemmed from the poor performance of the domestic Toys R
Us stores.
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CONCLUSIONCONCLUSION
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CONCLUSIONCONCLUSION
Conclusion
Based upon the above information, we recommend that Toys R Us is worth investing in.
Its strengths outweigh its potential costs; Toys R Us has brand name recognition, along
with powerful opportunities for joint ventures and alliances with online titans such as
Amazon. While discount/mass merchandising stores such as Walmart and Target have a
price advantage, Toys R Us can gain its edge through solidifying their online shopping
experience to make its plethora of products easier for consumers to purchase. Due to
economic conditions, the entire toy industry is experiencing poor performance. However,
with the new leadership proposed through the consortium, and the new focus on real
estate and research, Toys R Us can forecast a profitable and positive future. Also,
according to the valuation of the upside and downside cases, Toys R Us has many
opportunities to expand its margins and pull ahead of a market suffering as a whole.
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