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 …show more content…

We assumed 16.5% of compounded annual growth for the upside case. For the downside case, with a compounded annual growth rate of -4.5%, the company will not be able to make interest payments later years. This case suggests that the company will highly likely default on its debt obligation.
Conclusion
Referring to the adjusted balance sheet close after acquisition for the fiscal year ended as of January, 2005, the total debt of the company was 6,712 million dollars. The total debt-to-EBITDA multiples reached 8.61x high. We don't think the high total debt-to-EBITDA multiple will be a big problem since the multiples will decrease year by year based on our assumptions.
In the base case, if exit multiple is 8.00, the sponsor return including initial fees will be 4,820.9 million dollars. The return on investment will be 37.7%. (Exhibit B)
In the upside case, the sponsor return including initial fees will be 7,320.4 million dollars with a higher ROI of 47.6%, assume that exit multiple remains the same. (Exhibit C)
In the downside case, the LBO sponsors probably won't exit after a 5-year period ending 2010 because they cannot pay all debt and add more value to the firm. Even if they sell the company at 10.00 x, they will still lose money. (Exhibit D)
Even though the base case and the upside case could provide nice returns, we don’t want to join the consortium. The risks are too high in the downside scenario.
Exhibit A Prioritized Due