- The Washington Times - Thursday, March 17, 2005

NEWARK, N.J. (AP) — Toys R Us Inc., the nation’s second-largest toy seller, is staying in one piece after weighing a breakup.

The struggling retailer, dominated lately by industry leader Wal-Mart Stores Inc. and other discounters, announced yesterday that it would become a privately owned company in a $6.6 billion buyout deal proposed by a group that includes two equity firms and a real estate developer.

The deal ended a seven-month auction that started as an effort to divide the sluggish toy business from the smaller, but more lucrative, Babies R Us segment.

Instead, the company agreed to be swallowed whole by Kohlberg Kravis Roberts & Co., Bain Capital LLC and Vornado Realty Trust, which will be equal partners.

There was no immediate word on the buyers’ specific plans for the company’s roughly 1,500 stores.

“We look forward to building on the many strengths of the company to make the stores a better place to shop and work,” said Michael M. Calbert, a director at buyout firm KKR.

Toys R Us Chairman and Chief Executive Officer John H. Eyler Jr. said it was up to the new owners to determine what stores, if any, would be closed.

But he noted, “The new owners paid a significantly handsome price, and the only way you can pay that price is if you believe in the future of the business, so I expect this business to be around for a very long time.”

Toy vendors and analysts said they are hoping the buyout will help the company react more quickly to the rapidly changing toy industry and compete more effectively, analysts and vendors said.

Chris Byrne, an independent toy consultant, said a privately run Toys R Us will free executives from the pressure of quarterly earnings reports and allow them to build a business that typically has the bulk of its sales around Christmas.

“You have to expect that your second quarter is going to be slow and your third quarter is going to be slow, but that hopefully you’re going to make it up in the fourth quarter,” he said.

Toys R Us has been losing market share in the toy business to Wal-Mart and other discounters, such as Target Corp. It announced in August it would separate its toy business from the Babies R Us segment, which sells children’s apparel, furniture and accessories, but did not say how.

Some bidders reportedly wanted the whole company, rather than just part of it.

The deal comes amid gloomy prospects for the toy industry as discounters made the industry commodity driven. Children also are growing out of toys faster, embracing high-tech gadgets, such as cell phones and IPod players, found at consumer electronics stores.

Many toy makers are fighting back by offering items other than toys, from children’s furniture to child-friendly electronic gadgets.

Still, analysts expect it will be another tough year for toy makers. Overall traditional toy sales fell 3 percent to $20.1 billion in 2004, from $20.7 billion in 2003, following a 2.9 percent drop in 2003.

The consortium said it would acquire all shares of Toys R Us for $26.75 a share, an 8 percent premium over Wednesday’s close. The roughly 215 million Toys R Us shares outstanding account for $5.75 billion of the deal, with the remainder coming from outstanding options, nonvested restricted stock, warrants and convertible bonds, Mr. Eyler said.

The buyers also are assuming Toys R Us debt, which Fitch Ratings said totals about $2.3 billion.

Toys R Us shares jumped $1.23, or 5 percent, to close at $26 on the New York Stock Exchange.

Toys R Us had been a public company since 1978. The deal, expected to close by July, requires regulatory review and approval, the company said.

Although Toys R Us has 681 stores in the United States, and 601 overseas, the 218 Babies R Us stores have been an increasing factor in profitability.

Babies R Us, which sells baby furniture, clothes and accessories, accounted for three-quarters of the company’s operating income, despite logging just 15 percent of the company’s $11.6 billion in sales for the fiscal year that ended Jan. 31, 2004.

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