The Toys R Us LBO Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Due Diligence:

Before signing a contract, the company needs to investigate the business. It is known to be a legal commitment, but it is based more on voluntary investigations. Before going through with the business acquisition, there is a list of questions that a company needs to be asked. The lists of questions are as follows.

toys r us lbo case solution

1. What is the potential of growth in the company?

2. Has the company planned any exit strategy in case of losses?

3. What are the important and basic drivers of a turnaround plan?

4. What is the capital working requirement of the company?

5. What is the potential for growth in terms of company’s website?

6. Which of the segment is providing promising sales?

7. Which of the store is providing promising sales value?

8. Are there any growth prospects in the international business segment of the company?

9. What are the approaches of the company to deal with turnover in management?

10. What is the competitive background of the company?

Operating models of the company to analyze:

Sales growth of the company in all the three segments of the company i.e. domestic, International and Baby R Us has been done in the excel spreadsheet attached. EBITDA of Toys R Us Domestic is 5.3% of sales. In Toy R Us International, EBITDA is 10.8% of the company’s total sales. Lastly, EBITDA for Baby R Us is increasing year by year i.e. 14.3% in 2006, 14.6% in 2007, 14.8% in 2008 and 15% thereafter.

Assumptions for the website segment:

The website segment of the company contributes no such EBITDA. The future prospects of the business are unclear. It has been assumed that there will be no growth in revenue in given period. In addition to this, EBITDA margin of the company is constant at 0.3%. Further, no D & A in this segment.

Base case assumptions:

The revenue of the company has been decreased as 150 stores of the company have been sold. EBITDA of the company is increasing with 4.1% decrease in debt from seven times the EBITDA in 2005 to more than five point six times in 2007. The growth from domestic business is relatively slow as there is no such contribution from the website.

Downside case assumptions:

In the case of downside, the sales growth of the company has been shown in the spreadsheet attached. In addition to this, the company has failed to make any growth on the internet business and sold forty stores only.

Upside case assumptions:

In the upside case assumptions, a high increase in revenue has been assumed. In addition to this, sale of two hundred stores along with EBITDA experiencing a large increase because of sales in terms of growth.

Along with that, there are some common assumptions for both downside and upside case as well. First, losses would be major for the case of downside and reverse for the upside case. Along with this, growth in any other income and revenue would lead to higher upside case and lower for the downside case. The explanation of upside case has been shown in the excel spreadsheet as well.

Methodology:

In the base case, it has been presupposed that the annual growth rate is of 11%. The assumption is made on unassertive growth in terms of domestic sales along with positive expectations from online, babies R Us and international sales. With the help of online sales, the company can save relevant costs related to associate cost of running a store and display of products. With the growth in sales, EBITDA margin is assumed to grow with it. As far as the depreciation and amortization are concerned, it is assumed to be constant over the years. In general, the operations of the company will have the potential to generate adequate cash to provision the interest and debt payments. In addition to this, specializing in baby products and other video games will help the company to increase its sales over the period. Moreover, online sales along with international sales are expected to perform good as well. It has been assumed that the annual growth rate for the upside case has been 16.5% and -4.5%f for the downside case and thus it will not be able to make payments later.

Quantitative Analysis:

From the base case returns, the total debt of the company will be heavy and thus there is a high probability that it might be troublesome for the company if it becomes failed to earn adequate income. Likewise, the returns of the company have also been on the negative side with showing no improvement in the present and even in the future as well.........................................

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