Toys R Us
Toys R Us Leveraged Buyout Failure
Estimated impact: $6.6B investment lost; 33,000 jobs eliminated
Bain Capital, KKR, and Vornado acquired Toys R Us in a $6.6 billion leveraged buyout in 2005, loading the company with $5.3 billion in debt. The massive debt service ($400M+/year in interest alone) starved the company of capital needed to invest in e-commerce and store improvements during the critical period when Amazon was transforming retail. Toys R Us filed for bankruptcy in September 2017 and liquidated in 2018.
Decision context
Whether a leveraged buyout loading $5.3B in debt onto a retailer facing secular headwinds from e-commerce and big-box competitors was a viable financial structure.
Biases present in the decision
Toxic combinations
- Sunk Ship
- Status Quo Lock
Reference class base rates
Across all 146 curated case studies in our library:
Lessons learned
- Loading a retailer with debt during a period of structural industry transformation eliminates the financial flexibility needed to adapt.
- Anchoring to historical cash flow projections when the retail landscape was being fundamentally disrupted by e-commerce was a classic anchoring failure.
- The sunk cost of the LBO premium made it increasingly difficult to accept write-downs or pursue the operational investments needed for transformation.
Source: Toys R Us Inc. Chapter 11 filing, E.D. Va. Case No. 17-34665; KKR, Bain Capital, Vornado Realty Trust SEC filings (2005); CNBC investigation "The Death of an American Icon" (2018) (SEC Filing)
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