Toys ‘R’ Us Had Advanced Talks With Sycamore Before Liquidating

(Bloomberg) -- In its rush to find a buyer earlier this year and avoid liquidation, bankrupt Toys “R” Us Inc. landed on a familiar name: Sycamore Partners, according to people familiar with the matter.

The private-equity firm, which had already scooped up several troubled retailers, held advanced talks with Toys “R” Us about acquiring the chain and keeping open half its 800 U.S. locations, said the people, who asked not to be named because the negotiations weren’t public.

Target Corp. also seriously pursued buying some of the retailer’s assets, including the parent registry and website of its Babies “R” Us brand, one of the people said. But those potential deals collapsed in February when the retailer’s senior creditors decided there would be a better return by selling off assets during a liquidation of the U.S. retail business, the people said. By mid-March, management publicly disclosed the shutdown after a Bloomberg News report that it was preparing for that option.

Toys “R” Us, Sycamore and Target declined to comment on the talks.

Lender Strategies

Lenders were convinced that they would create more value from selling the brands apart from the store fleet because they were already generating millions in licensing fees from overseas divisions, one of the people said. For example, Toys “R” Us in Asia paid royalties to the U.S. parent for the right to use its brands. That led lenders to believe they could license its intellectual property out to additional entities, plus whoever might take over the U.S. retail operations, which entered bankruptcy in September.

That scenario hasn’t materialized -- but it still could. The company will begin auctioning off its brand names and customer data on June 18. An approved buyer hasn’t emerged to keep any of the U.S. Toys “R” Us stores open, which are expected to all close this summer after selling off merchandise.

While the talks with Sycamore didn’t lead to a deal, it does show that there was legitimate interest in maintaining operations at Toys “R” Us and avoiding the loss of 33,000 U.S. jobs.

Early on, lenders backed the idea of finding a buyer, the people said. But as it became clear how much the chain struggled during the holiday-shopping season, creditors led by Solus Alternative Asset Management turned toward liquidation, some of the people said. The lenders wanted the company to announce its U.S. shutdown in mid-February. But the retailer pushed back, and got another month to pursue other options, which proved fruitless.

Solus didn’t comment on its role in the bankruptcy of Toys “R” Us.

The involvement of Solus and other firms underscores how distressed-debt investors -- little known outside the financial world -- play pivotal roles in bankruptcies. Their core strategy is to buy up assets of troubled companies, and then enact a plan to increase their value.

In the case of Toys “R” Us, that ended up meaning liquidation.

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