Good morning, Term Sheet readers.
Nineteen members of Congress sent a letter to the private equity firms that backed Toys “R” Us Inc, according to The Wall Street Journal. The letter was addressed to KKR, Bain Capital and Vornado Realty Trust, questioning the firms’ role in the bankruptcy and critiquing the leveraged buyout model so common in the industry.
The letter reads:
“Leveraged buyouts—such as those facilitated by your companies—often result in mass job loss, closure of profitable businesses and unnecessary financial burdens for local government. Such buyouts harm communities, while investment managers walk away with significant gains.”
It goes on to urge the firms to compensate the approximately 33,000 workers who lost their jobs as a result of the bankruptcy. But it’s not as simple as the letter makes it out to be. The private equity firms were not in favor of liquidation. KKR issued a statement that the embattled retailer faced turmoil because of market forces, saying “To be clear, we did not want the U.S. operations to be liquidated. We wanted the company to restructure, return to health and vitality and stay in business — but the creditors had a different and prevailing view.”
This is an important wrinkle in the history of Toys ‘R’ Us because its demise was one of the most expensive and spectacular public failures in recent history. Here’s a quick summary: In 2005, the trio of private equity firms took over the company in a $7.5 billion leveraged buyout. For the next 13 years, Toys ‘R’ Us would wrestle to pay off mountains of debt amid a recession & a retail disruption.
In March, all efforts to rebuff competition and recover from crushing debts became futile. The debt-laden toy chain announced it would go out of business and shutter its U.S. operations. This meant more than 30,000 workers would lose their jobs.
Some former employees rallied outside the offices of Bain, KKR, and Vornado to protest losing their jobs without severance. Now, laid-off employees, along with union representative and advocacy groups, are asking for a total of $75 million in severance. According to Bloomberg, Bain, KKR, and Vornado, which together collected $470 million in fees and interest payments over the years, will end up losing well over a billion dollars combined. KKR and Vornado have written off their investments.
We can argue about how much of Toys ‘R’ Us’s downfall was caused by an industry-wide retail upheaval and how much of it was a heavy debt burden, but one question remains unanswered — do the PE firms have an obligation (and of what kind) to the former employees of the toy giant?
HOUSEKEEPING: I’ll be out of the office for the rest of the week, so please send all deals, tips, and feedback to my colleague Lucinda Shen at email@example.com.
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