Toy R us Case

Alexandre Bartone

The case was an actual buyout of Toys "R" Us by a consortium of private equity firms that
included KKR, Bain, Capital and Vornado (pages 521 to 538 of the textbook by Stowell). You are
asked to join the consortium. Before making your decision, please provide the following:

1. an LBO model with estimate/projection in relevant returns;

• Determining Cash Flow Available for Debt Service in 2006 in $

Consolidated EBITDA 860.8

Net Capex 217.5

EBITDA -CAPEX 643.3

INCREASE - DECREASE IN WCR (0.1)

INCREASE – DECREASE in other long term assets 0.0

Increase decrease in other LT liabilities 0.0

Cash Taxes (4.3)

Cash on balance sheet in excess of a minimum balance 0.0

Other sources/use of cash (4.4)

Proceeds from store sales 217.7

Cash available for debt services 856.6

Deleveraging Deleverage & Deleveraging, Improve

improve Margins margins & Multiple
Expansion
Sources of funds
Total Debt $4,176.8M $4,236.8M $4,236.8M
Total Equity $1,059.2M $1,059.2M $1,059.2M
Total investment $5,230M $5,296M $5,296M
Year 5 Assumptions
Cumulative cash to repay debt $1,092.44M $1,383.80M $1,383.80M
Projected EBITDA $662M $871,19M $871,19M
Assumed exit multiple 8x 8x 9x
Transaction value 8 x $662M = $5,296M 8 x $871,19M = 9 x $871,19M =
$6,969.52M $7,840.71M
Net debt at exit $4,236.8M - $1,092.44M $4,236.8M - $4,236.8M - $1,383.80M
 = $3,144.36M $1,383.80M = = $2,853M
$2,853M
Equity value $2,151.64M $4,116.52M $4,987.71M

2. risks and merits of the transaction.

The first risk of the transaction is that Toy R us is evolving in the toy retail sector which is very
competitive and doesn’t know a strong growth for year.

First and foremost, KKR has a lot of experience with this sort of transaction, having engaged in 10
club acquisitions in the last two years. KKR has extensive experience structuring exceedingly
complicated transactions. Financial engineering is a specialty of Bain Capital in the retail industry.
Moreover Vornado is very specialized in the real estate transactions.

Another significant risk is that the purchase with Toys R Us is classified as a club deal. It means
that if I join the consortium, I'll have to collaborate with four other private equity companies to
make judgments. It will be difficult to get all five firms to agree on any choice that is made.

The first risk is that the toy industry is in decline. Sales have been declining over the past three
years. From 2004 to 2005, sales are down by 4 percent. From 2003 to 2005, mass market
retailers gained 5.4 percentage points in market share at the expense of toy stores according to
the book. This danger could, in some ways, be a fantastic opportunity. KKR, Bain, Capital, and
Vornado may be able to buy the company for a good price.

From a financial point of view, the objective of this club deal is to use leverage in order to develop
the company. It seems that it could be possible to expend, especially in Europe. The net cash
provided by operating activities is always higher that the net income.

3. your opinion on the proposed capital structure;

The suggested capital structure would have an extremely high leverage rate. Prior to the
transaction, the debt-to-equity ratio was less than 34%. After taking out a $700 million senior
secured credit facility, a $1,900 million unsecured bridge loan, a $1,000 million secured
European bridge loan, and a $800 million mortgage loan agreement, the company's debt ratio
now exceeds 80%.

Because KKR, Bain, Capital, and Vornado are unwilling to put further money into the toy R US
transaction, the company will succeed with the proposed capital structure only if it knows a
strong growth.

4. potential exit strategy

We should consider three different exist strategies.

The first option could be to make an IPO. If the private equity companies still consider growth
opportunities, they would thus still keep shares of the company with an official market value.
Another option could be to sell the company to another private equity company if they don’t
succeed in bringing growth to the toy company. Other private equities company may succeed.

The last option could be to sell the company to another player of the retail market such as
Amazon or Target.

5. your decision as to whether or not to join the consortium.

In my opinion it might be interesting idea to join the consortium.

Toy r us is basically a company with fundamentals well oriented in the Toy market. People
won’t stop to buy toys for their kids. Moreover, the population is predicted increase
demographically.
Then we will join seasoned player such as KKR, Bain or Vornado which benefits from a
precise expertise in their respective field. The strategy presented and the financial
predictions seem respectful of the current trend market.