Toys "R" Us Lbo Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Toys "R" Us Lbo Case Solution

Investment Merits and Risks

Merits

The main advantage of the transaction is that the target company is a valuable toy manufacturer that is well known in the international toy industry. With a strong market position and high market share, if business premises and plans are efficient, business turnover is expected to increase. The strong division of the company is Babies R, but its current status is not high, so the value of Babies R may be better. The company’s international operations have been particularly successful, and the company also has a real estate portfolio to protect disadvantaged companies. An additional benefit of the transaction is a strong brand and brand value, as the company can maintain its position in a highly competitive market despite adverse economic conditions.

Risks

Retail sales in the toy industry were $ 21.3 billion in 2005, down 4% from $ 22.1 billion in 2004, and analysts do not have any optimistic forecast for the future sales in the United States. The company is extremely exposed to the fierce market competition, which in turn is making the acquisition of toy companies by KKR, Bain Capital and Tornado Realty both challenging as well as risky. In addition to this, trading prices with high leverage are high. Due to the seasonal sales and risk; the company is faced with liquidity problems due to the unpredictability in the industry.(Firestone, 2012).

Due Diligence

Before acquiring a business, the business must ask a number of queries. The queries are listed as follows:

What is the growth potential of the company?
Has the company planned an exit strategy to avoid the loss incurred?
What are the important and fundamental drivers of the agenda?
What are the working capital requirements of the company?
What is the growth potential of the company's website?
Which market segment has the good prospects?
Which store offers significant sales value?
What is the company’s approach to manage the loss of the administrative staff?
What is the company's competition history?

Assumptions

Base Case Assumptions:

The company’s turnover declined as the company sold 150 stores. The company’s EBITDA continued to grow and its debt decreased by 4.1%, from 7 times EBITDA in 2005 to more than 5 percentage points in 2007. The growth of domestic activity is relatively slow, because the website did not yield results or contribution.

Downside Case Assumptions:

Under unfavorable conditions, the increase in the company's sales is shown in the attached table. In addition, the company did not achieve growth in its Internet business and sold only 40 stores.

Upside Case Assumptions

Under the bullish scenario, assume that income has increased significantly. In addition, due to the increase in sales, two hundred stores significantly increased sales and EBITDA.

In addition, there are general assumptions about down-link and up- link relationships. First, for the down-link, the loss will be the main one, while for the up-link, the reverse will be true. At the same time, income and further income growth result in lower and lower profits. The Excel spreadsheet also shows an explanation of the bottom-up situation.

Methodology

Suppose the base case has an annual growth rate of 11 percent and the online sales, can reduce the costs for businesses associated with running a store and displaying a product. As sales increase, EBITDA margins would also increase. With respect to the depreciation and amortization; we have assumed that it has remained unchanged over the years. In general, the company’s operations are likely to generate sufficient liquidity to accumulate payments associated with debt and interests. In addition, both online and international sales are expected to perform well. Assuming an annual growth rate of 16.5% for the upward position and -4.5% f for the downward position, there wouldn’t be any future payments.

Potential Exit Alternatives for the Investment

There are three possible exit strategies for this investment. First, since Toys is not yet public, you can go out and sell the deal and participate in the IPO. Another exit strategy is for the consortium to sell games to competing strategic buyers such as Wal-Mart or Target.

The consortium has chosen the ideal company to invest at the best time, at the best price. Second, the companies involved in the leveraged stake, have entered into a very useful club deal. BSS is very mature in the private equity sector and is known for its successful leveraged buy transactions. In addition, Tornado is an established real estate investment fund that helps you value and manage Toys R US’ huge real estate. Another reason due to which I would recommend the company to join this consortium, is that the sector has many growth opportunities in the online sales, baby and child sales and European sales. These opportunities will facilitate the business’s growth and have the potential to offer more exit strategies when the time comes.....................

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Toys “R” Us Lbo Harvard Case Solution & Analysis