Toys “R” Us Lbo Case Solution & Answer

Toys “R” Us Lbo Case Solution


Toys “R” Us, Inc. is the world’s leading retailer of specialty toys and youth products. Its 11.1 billion United States dollars revenues fell by 1.9% when compared to the same period last year. Toys R Us is facing an increased competition from the downstream demand and mass / discount channels, such as: Wal-Mart and Target.

The company’s global gaming business is extremely based on the periods, with the highest net income and sales in the fourth quarter. The company’s continued success and growth is based on a sales team trained in toys, exclusive specialty stores and exclusive classic and on-demand products to provide customers with an unforgettable shopping experience. The company has been hit hard by increased competition from discount and mass chains (such as Target and Wal-Mart) and increased downstream demand.

Industry Dynamics, Major Issues and Potential Catalysts for Improvements

In 2005, the outlook for the U.S. retail toy industry was not optimistic. Between 2004 and 2005, sales in the sector decreased by 4%. Despite of growth in some sub-categories; the sector’s dollar sales fell for the third consecutive year. The industry is threatened by the new trend of young children favoring electronic toys and electronic products over traditional toys, and sales of electronic toys continued to exceed for those of traditional toys.

Analysts currently expect the toy retail sector to grow 0-2%, but as the largest game in the specialty gaming industry; it has a competitive advantage over its competitors. Now these big discount stores have started to enter this industry, which is making the retail gaming industry very competitive. An additional problem for the industry is that the success of existing businesses depends on their ability to identify and track product trends and needs. If the retailer overestimates or underestimates demand, there is an obvious surplus or shortage of inventory, leading towards lower profits.

In addition, the sector is strongly affected by consumer spending, and if the economy slows, sales will reflect this trend. While the industry as a whole, is constantly declining / growing, this market has a segment with a growth potential: the infant, child and kindergarten market. With the expected increase in the child population and the increase in spending per child, experts estimate that sales will continue to grow by 3-6%. However, European toy retailing is not so bad. Due to increased demand for toys for infants and young children, toy sales in Europe increased by 3% in 2005 (decreased by 4% in the United States). Industry analysts predict that European toy sales will outperform those sold in the United States.

Leveraged Buyout

Acquisition of leverage can be defined as the acquisition of an enterprise by a third party or any other enterprise. These leveraged acquisitions are often carried out by private equity firms specializing in such transactions. The main purpose and objective of this concept is to acquire acquisitions without major capital investments. This will allow the business to determine the business’s maximum purchase price which the business can settle with debts.

An Investment Prospect

In order to analyze and understand the investment recommendations of the club’s business consortium; the company must complete some of the following transactions:

Initially, the company will be bought by investors who want to invest at a price of $ 26.75 per share at a transaction price of $ 6.7 billion. This value is 9.9 times EBITDA in 2005. At the same time, the company’s financing costs will be 7 times 2005 EBITDA. The composition of debt is cash, new debt, and the promoter’s own resources. Cash includes $ 1 billion in cash and the remaining debt includes $ 1.07 billion, 1.3 billion in sponsorship capital and 4.4 billion in new leverage.

In addition, the company’s costs and ownership are shared equally among all members of the consortium. However, the price to be paid for the entire transaction shows that it is 122.5% higher than the share price. Therefore, the main reason for the transaction is the separation of Babies R Us from the company. On the contrary, since the company’s management decided to sell, interest in the department has waned…………………..

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