On the day that both Claire's and Toys 'R' Us file for bankruptcy, perhaps we can pause briefly and contemplate:
- How vulture capitalists ate Toys 'R' Us
After big success in the 1980s, Toys 'R' Us' performance turned lackluster in the 1990s. Sales were flat and profits shrank. Toys 'R' Us was a public company at the time, and the board of directors decided to put it up for sale. The buyers were a real estate investment firm called Vornado, and two private equity firms named KKR and Bain Capital. [...]
The trio put up $6.6 billion to pay off Toys 'R' Us' shareholders. But it was a leveraged buyout: Only 20 percent came out out of the buyers' pockets. The other 80 percent was borrowed. Once Toys 'R' Us was acquired, it became responsible for paying off that massive debt burden[...]
[...]
Whatever magic Bain, KKR, and Vornado were supposed to work never materialized. From the purchase in 2004 through 2016, the company's sales never rose much above $11 billion. They actually fell from $13.5 billion in 2013 back to $11.5 billion in 2017.
- Claire's Plans Bankruptcy, With Creditors Taking Over
Claire’s Stores Inc., the fashion accessories chain where legions of preteens got their ears pierced, is preparing to file for bankruptcy in the coming weeks, according to people with knowledge of the plans.
The company is closing in on a deal in which control would pass from Apollo Global Management LLC to lenders including Elliott Capital Management and Monarch Alternative Capital, according to the people, who asked not to be identified because the matter isn’t public. Venor Capital Management and Diameter Capital Partners are also involved, the people said. The move should help ease the $2 billion debt load at Claire’s.
- America’s ‘Retail Apocalypse’ Is Really Just Beginning
The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.
The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.
There's another way to look at this. These buyouts are made by a consortium comprising both private equity and banks. They hold different kinds of capital: private equity has high risk and high reward (according to whether the business prospers), while the banks hold debt with much lower risk/reward.
ReplyDeleteThe real villain is the Zombie Economy imposed by governments and central banks, that makes it artificially advantageous to structure deals this way[1]. In the UK (and I think elsewhere), this has long been the case because debt interest is tax-free while equity profits are taxed. Then money-printing since 2008 has served to amplify the problem hugely.
[1] That is, other things being equal - the premise that fails when a business declines and goes bust.