The Toys “R” Us Lbo Case
The Toys “R” Us LBO
Background
Toys "R" Us, Inc. is the world’s leading dedicated toy and juvenile products retailer. As of January 29, 2005, it operated 1,499 retail stores worldwide and generated 11.1 billion in revenue. However, that’s a decrease of 1.9 percent from a year ago. Toys "R" Us has suffered from both downstream demand and increased competition from mass/discount channel such as Wal-Mart and Target. A group of private equity investors intends to do a leverage buyout of Toys "R" Us. They want to determine the risks and merits of an investment in Toys "R" Us, evaluate the spectrum of returns using multiple operating model scenarios, and identify strategic actions that might be undertaken to improve the risk/return profile of the investment.
Leverage Buyout (LBO)
A leveraged buyout is the purchase of a company by an outside individual, another firm, or the incumbent management using large amounts of debt to finance the purchase. Most often, LBOs are undertaken by private equity firms that specialize in these transactions. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
An LBO analysis determines the maximum purchase price for a business that can be paid based on certain leverage (debt) and equity return parameter, develops a view of the leverage and equity characteristics of a leveraged transaction at a given price, and calculates the minimum valuation for a company.
The returns in an LBO are driven by three factors, which we demonstrate in our topic on creating value in LBOs, including the deleveraging (paying down debt), operational improvement (e.g., margin expansion, revenue growth), and multiple expansion (buying low and selling high).
Both equity holder and debt holder bear a high risk. For equity holders, in addition to the operational risk assumed risk arises due to significant financial leverage. Interest costs resulting from substantial amounts of debt are
Background
Toys "R" Us, Inc. is the world’s leading dedicated toy and juvenile products retailer. As of January 29, 2005, it operated 1,499 retail stores worldwide and generated 11.1 billion in revenue. However, that’s a decrease of 1.9 percent from a year ago. Toys "R" Us has suffered from both downstream demand and increased competition from mass/discount channel such as Wal-Mart and Target. A group of private equity investors intends to do a leverage buyout of Toys "R" Us. They want to determine the risks and merits of an investment in Toys "R" Us, evaluate the spectrum of returns using multiple operating model scenarios, and identify strategic actions that might be undertaken to improve the risk/return profile of the investment.
Leverage Buyout (LBO)
A leveraged buyout is the purchase of a company by an outside individual, another firm, or the incumbent management using large amounts of debt to finance the purchase. Most often, LBOs are undertaken by private equity firms that specialize in these transactions. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
An LBO analysis determines the maximum purchase price for a business that can be paid based on certain leverage (debt) and equity return parameter, develops a view of the leverage and equity characteristics of a leveraged transaction at a given price, and calculates the minimum valuation for a company.
The returns in an LBO are driven by three factors, which we demonstrate in our topic on creating value in LBOs, including the deleveraging (paying down debt), operational improvement (e.g., margin expansion, revenue growth), and multiple expansion (buying low and selling high).
Both equity holder and debt holder bear a high risk. For equity holders, in addition to the operational risk assumed risk arises due to significant financial leverage. Interest costs resulting from substantial amounts of debt are