Toys ‘R’ Us Inc. is prepping for potential liquidation if its negotiations with creditors do not end up in a deal that can help the struggling toy retailer to emerge from bankruptcy.
The U.S.-based toy retailer is making preparations of liquidating its bankrupt operations after failing to find a buyer or reach a debt restructuring deal with lenders. So far, the talks are continuing and no decision has yet been taken.
While the situation is still fluid, a shutdown of the U.S. division has become increasingly probable in recent days. Hopes are starting to fade away as no buyer has emerged so far to keep some of the business operating, or lenders will agree on terms of a debt restructuring.
Emergence from Bankruptcy
The toy retailer’s U.S. division entered bankruptcy in September, planning to emerge with a leaner business model and more manageable debt.
The company in January said it would shut about a fifth of its U.S. stores as it tries to emerge from one of the largest ever bankruptcies by a specialty retailer.
A new $3.1 billion loan was obtained to keep the stores open during the turnaround effort.
Toy ‘R’ Us was hoping that strong sales during the key holiday season would boost its chances of clinching a deal with its creditors in bankruptcy. However, the result became worse more than expected during the holidays, casting doubt on the company’s viability.
The situation has also become worse for many of the retailer’s overseas divisions, which weren’t part of the bankruptcy. Toys ‘R’ Us’s U.K. unit put itself in the hands of a court administrator after discussions about selling business fell apart.
Toys ‘R’ Us’s Downfall
The downfall of the U.S. toy retailer can be traced back to a $7.5 billion leveraged buyout in 2005 when Bain Capital, KKR and Vornado Realty Trust loaded the company with debt. For years, the company was able to refinance its doubt and delay a reckoning. However, the emergence of online competitors, like Amazon.com Inc., weighed on results.
The company’s massive interest payments also sucked up resources that could have gone toward technology and improving operations.
For now, the liquidation will be a big blow for the toy industry, as the chain makes up about 15 percent of U.S. toy revenue. Moreover, the retailer was willing to take chances on new products and small companies. Bigger rivals like Walmart Inc. and Target Corp. would typically take a more cautious approach.
The company is expected to report three-month earnings to the end of January later this month.
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