One of the methods scientists use to predict a particular outcome involving animals is through careful observation of recurrent actions by an individual or group when presented with a given object or in a given situation. After seeing the same behavior repeated over and over, observers are capable of making very accurate predictions that some people may misinterpret as being prophetic. It is the same with businesses, and it is not uncommon for a casual observer to make accurate predictions regarding the success or failure of a company based on observable patterns and procedures of successful enterprises, and a novice may appear brilliant when they successfully predict a particular outcome based on observable patterns. This week, the largest American toy retailer gave itself three years to reverse declining profits after pulling an initial public offering (IPO) and hoping a new strategy under a new CEO would save Toys R Us. However, based on past recurrent actions by a large private equity firm, Toys R Us are headed for bankruptcy and dissolution that will earn Bain Capital Partners outrageous profits as they harvest another company under their supervision.
During the 2012 presidential election, Americans learned how Willard Romney’s private equity firm, Bain Capital, bought companies with plenty of liquid assets, leveraged them with crushing debt, installed their surrogates to “run” the company, and when they failed to meet their debt obligations, took them into bankruptcy and reaped the benefits because Bain’s surrogates represented the creditors and debtors. It was a winning proposition for Bain Capital, but devastating for shareholders, creditors, employees, and debtors who were fleeced while Bain made off with the profits and companies’ assets often to repeat the process again until there was nothing left but the business’s obituaries.
Toys R Us is in trouble because although they have plenty of liquid assets, they have $4 billion in debt coming due by 2018 and after a disappointing holiday season that saw their profits decline the most since Bain Capital Partners bought them out in 2005, their CEO is stepping down and awaiting a new leader to implement a strategy to save the company. The company said “unfavorable market conditions” and a “leadership transition” drove them to pull the IPO as well as secure a new seven year loan to repay another loan while awaiting a new leader and strategy for success. The current CEO, Gerald Storch, has been with the company since Bain Capital Partners bought out Toys R Us, and will stay with the firm until a suitable replacement is found.
An analyst at a debt researching firm, Gimme Credit LLC, said “The financial problem is that the company is so leveraged on a multiple basis. It would be very difficult for Toys “R” Us to go ‘on the road’ to raise equity without a good management bench,” and it is a proven and winning tactic for Bain who typically leverage companies with debt, install their own surrogates, and make out like bandits when the company is unable to meet its obligations. Last week the company arranged for a $400 million loan to go with cash on hand to repay another loan of $617 million, to be repaid over seven years. Another analyst said the “company has significant liquidity as it stands today, and we think they will access the market in the next 12 to 24 months to refinance existing high-coupon debt.”
Toys R Us is going through a typical Bain company’s death throes that include being leveraged with crushing debt to be repaid with more debt burden until the company has little choice but to declare bankruptcy. It is noteworthy that Bain Capital Partners LLC is a firm Willard Romney started and is separate from Bain Capital Romney claims he “retroactively retired” from in 1999 even though SEC and FEC filings show he was still running the private equity firm until after 2001. The FEC or SEC has never filed charges against Romney, but that is another issue.
It is likely Toys R Us will not survive the three year period they gave themselves to reverse declining profits or the crushing $4 billion in debt due by 2018, especially when they are repaying existing debt with more debt. A credit analyst with Fitch Ratings said “They have to do major restructuring to the business as the current model is facing big pressure,” and that “it really is a tough story for the company to grow out of this capital structure” that many, many other Bain companies experienced prior to being harvested by Bain. The “major restructuring” Bain businesses normally go through is laying off employees, selling assets, eliminating and raiding pension accounts, and then shuttering the businesses when the assets are gone leaving creditors and debtors holding the bag.
Obviously, predicting Toys R Us is finished is only conjecture, but it is conjecture borne of observable patterns of behavior by vulture capitalists like Bain Capital, or Bain Capital Partners LLC, or whichever private equity firm Romney is associated with. Toys R Us may survive the restructuring and mounting debt to prosper beyond expectations, but based on Bain’s model of buying successful businesses, leveraging them with debt, and restructuring them with more debt, layoffs, and closures, it is safe to say Toys R Us will go the way of many, many other companies and file bankruptcy, liquidate their assets, and send the proceeds directly to Willard Romney’s offshore tax havens to avoid paying taxes on profits earned off the misery of another American business.