Value Implications of Toys R Us Bid Rejection
An auction for the Toys R Us Canadian assets is scheduled to be held on Monday, with Fairfax bidding for the unit as a going concern at $300 million CAD and likely sitting as the stalking horse. The US stores, it appears, will be liquidated as announced in March. Isaac Larian’s bid for the US business was rejected by the Company as unqualified. A short analysis of the liquidation value of Toys R Us US assets reveals the reason.
The Rejected Offer
It was reported by the WSJ and other outlets that the $675 million bid by Isaac Larian for 274 of the remaining US locations was not considered qualified under the bidding procedures. Included with this bid was an additional $215 million for most of the 80 Canadian locations.
Larian’s last minute bid for parts of the US and Canadian Toys R Us business shocked some. The toy industry, poised to lose a large outlet, likely had mixed feelings over the possibility of seeing its toy-focused big box retailer remain alive, but with a competitor at the helm. While that would have presented a hurdle to the reorganized TRU, that likely did not factor into the decision, at least directly.
Ultimately it was determined that the net amount of cash yielded by the liquidation of those 274 stores would be greater than the going concern sale. Let’s assume the bid was a) believable, b) all cash and c) would require an additional $50 million of expenses to get to the going-concern sale close versus the planned liquidation (Larian was targeting late May). So that means that $625 million was bid for the best 274 US stores, bringing us to a bid value of just about $2.3 million per store, is less than liquidation value. Larian seemed shocked by the news, but should he have been?
Inventory Value
The company forecast calls for a bloated $1 billion of merchandise in the remaining 411 US stores as of May 2018, or $2.4 million per store. Based on a real estate analysis contained in public cleansing documents, inventory at the top performing 300 US stores looks closer to $1.4 million than $2.4 million. An additional $1 million per store of forecast inventory could have meant that the Larian bid was likely to be adjusted down by $274 million as a working capital true up to the forecast, resulting in a true bid of just $1.3 million per store.
Based on the 2017/2018 forecast assumptions regarding the first waves of store closures, liquidation value is 108% of book value on in-store inventory of approximately $800k per store. Low for sure, but remember these stores comprise the worse performing half of the US stores. Assuming the inventory level is closer to $1.4 million of inventory per store, inventory alone should yield about $1.5 million. Liquidation expenses are around $300k per store, for a net of $1.2 million.
Property and Equipment Value
On top of the $1.2 million of net inventory per store, there is real estate, fixtures, and equipment that is likely to yield a substantial amount. The net book value of US property and equipment is approximately $1 billion for the remaining 411 stores per the forecast. That’s an additional $2 million per store, even at 80%. Lenders to Propco I and II, the entities that hold much of the real estate along with TRU Delaware, would need a full payoff to release liens on the real estate. Yet there is little value in Larian’s bid beyond the inventory value.
Conclusion
A qualified bid for the US stores that would be in the ballpark of liquidation would be more like $3 million per store, or $822 million. Putting it on an equal basis with the Larian bid means adding back $1 million per store of extra inventory in the forecast, for a bid of approximately $1.1 billion. Compare that to Larian’s bid of $675 million, and it’s no wonder why it was a non-starter.
The Fallout for General Unsecured Creditors
The TRU suppliers likely would have reaped at least a short-term benefit by maintaining an established outlet and future business, and employees who retained jobs certainly would have been helped. Unfortunately senior lenders are not going to give up value to help junior creditors, and in fact it would be antithetical to a main premise of bankruptcy and a foundation of the financial markets, the absolute priority rule.
So, what does this mean for the likely payout to the unsecured claims against Toys R Us? For the answer to that question, and more analysis like this throughout a case, you’ll have to subscribe to our Claim Pricing Reports.