Damla YILMAZ

MBA 588
CAPITAL MARKETS AND INSTITUTIONS
Case Analysis
The Toys “R” US LBO & Freeport-McMoRan: Financing an Acquisition & Avago

Case 1: The Toys “R” US LBO

This case investigates the experience of a private equity investor evaluating a potential
investment, trends and participants in the private equity industry. To understand how private
equity firms analyze investment opportunities through application of an LBO model that
summarizes returns and risks. Also, to review private equity participation in club deals, large
(and early) dividends, and IPOs.

The Company’s worldwide toy business was highly seasonal (especially including the all-
important holiday sales of November and December). After 2003 holiday season, the
company retained Credit Suisse First Boston (CSFB) as its financial advisor. The Company
and CSFB initially decided to separate the US toy retailing business and Babies “R” Us by
running a thorough sale process for its toy retailing business. However, this was rejected and
instead to sell the portfolio of businesses together. In 2005, the company sold the entire
worldwide operations to the consortium of KKR, Bain Capital, and Vornado Realty Trust for
$26.75 per share in a $6.7billion transaction. The consortium assumed the Company’s
existing debt and cash not used in the transaction. There are some risks and merits of the
transaction. Consequently, the company became more leveraged with the transaction.

Risks:
 It is a very competitive industry.
 It is a highly volatile ande xpanding market (Walmart, Target, etc.).
 Specialty stores already ousted.
 Big changes could lead to big fall-out

Merits:
 Changing industry could allow consortium to make dramatic changes to Toys "R" Us.
 In the global toy market, target company is the main leader.
 There is a lot of capital within the consortium.
 Although sales are decreasing, they have eye-catching cash flows.

The potential exit alternatives for this investment:

 IPO at the time of acquisition (Toys”R”Us was not a public company).

 Selling to a strategic buyer which is their competitor.
 Selling to a financial buyer. (able to resell the company to another PE firm)
Damla YILMAZ

Case 2: Freeport-McMoRan: Financing an Acquisition

Case 3: Avago