Basically, the company had to pay for its own buyout when private equity firms KKL, Vornado, and Bain bought the company for $6.6 billion, mostly with loans.
Because the company then had to pay off those extreme loans, they were forced to sell off their assets and property, which they leased back from the very private equity firms that now owned them.
The same thing happened more recently with Red Lobster and JoAnn Fabrics.
below is a reply to a comment I made below, pasting here as I find it crazy how this went down and is allowed.
For those curious I did a little digging. I’m on mobile so won’t be going in and out to add company names etc.
Basically, the private equity firms got together and said let’s buy Toy R Us for $6.6B but we only want to use say 300M of our own money and get a loan for the rest.
Then they bought Toys R Us but made them sell all assets to equity firms which then leased them back to Toys R Us so they could pay back the loans. This means Toys R Us are paying hundreds of million a year to cover loans and can’t put that money into making a better business.
The private equity firms also made Toys R Us issue dividends in the hundreds of millions so private equity can make money.
In the end private equity walked away with over $1B in profit whilst Toys R Us declared bankruptcy with $5B still left to pay.
What a fucking insane system. Like how many people lost their jobs so these ghouls could make some extra cash off its downfall.
And people think I’m crazy for making my life harder by not shopping at places like Amazon or being a pirate and not giving money to Netflix etc.
I feel I am living in crazy land. Like the Uk has all our pensions and shit tied to the damn stock market, ensuring we can never really leave this system.
Sweet jesus. How is this not some kind of hyper mega ultra fraud?
I have no idea and it seems insane to me.
I was looking for the same thing in my country, UK, thinking we can’t be as bad as America, but nope many of the companies that have died during my life have been due to LBOs. The world is insane and I don’t see how we can change it.
In the UK I learnt that Asda one of our largest supermarkets is in a similar place due to two brothers doing an LBO to buy it. Now it’s saddled with debt meaning it won’t be able to innovate like Tesco or Sainsbury’s and thus will likely just bleed customers. Makes me wonder why these two brothers with more money than God would want to carry on, like I literally can’t comprehend wanting more than you need. Perhaps I have different motivations as I see time as my most precious asset and will earn less money than I could just for the easier life of being able to chill more and do the things I like.
the primary shareholders of a company can usually do whatever they please (as they should in the case of some proprietorship) as such can sell whatever assets for whatever price.
I’m kind of financially illiterate
what part of the firm’s actions were fraudulent? if they make an offer and toys r us accepts, there’s nothing predatory going on is there?
Many of these are hostile buyouts, which means they use their money to buy a majority of shares in the company and then overthrow the board. I don’t know if the Toys R Us sale was one of those though.
And they’re not saying it is fraudulent. Just that it should be fraudulent.
It wasn’t fraud but it was poor business decisions based on their hope for massive growth instead of seeing success as steady profitability. They sold off assets (real estate) and then signed up to lease the property back from the new real estate owners. This shifted assets to liabilities. They idea would be to use cash to grow the business. They took too much cash as distributions to investors instead of making sound long term business decisions that would keep ToysRUs operating for the long term.
thank you for the explanation
What I don’t understand about the whole thing is who ends up holding the bag of all that debt?
Like banks that lend them billions must be intelligent enough to know how private equity takeovers like this work. So if they lend them money, they surely would want to get that off their books asap. But who do they sell it to? I can’t imagine there is any type of reinsurance for this, since insurance providers should know even better.
I imagine some of the debt is to employees and small contractors, but can that really account for such a massive sum?
So the Equity Holders (The Private Equity firms) were largely shielded from risk as they had taken out billions in dividends and they had a small equity state relative to the debt meaning their downside was limited.
The creditors (large banks) were left holding the bag, but they’d had years of interest payments so they wrote off the rest and likely still made some profit.
Employees, suppliers, and landlords. Employees lose their jobs, suppliers get pennies on the dollar for what they’re owed and landlords might have got some money but still not all.
So in short it was the banks, but don’t forget they had years of interest payments and after all they took the risk.
The banks can also technically short the stock as well once the buyout was public, knowing how shit the deal was they can make money on the downside at the expense of all the pensions, 401ks etc that had initially bought the stock. There also isnt a limit that prevents shorting the stock more than shares are in existence. Hence why the gamestop situation was close to breaking the whole stock market a few years back when they started turning everything around for the companies bottom line. With the stock now able to make it think a bout a billion more shares over time the out for the short side has been sort of given without completely nuking the market. But as when the shares are diluted is up to the board it allows gamestop to take advantage of the short side to create more cash on hand for themselves threw timing their market offerings to coincide with when swaps that are housing those shorts come due. In the toys r us case the executives and board were happy to take their golden parachute from the buyout and let ordinary people’s pensions and 401ks carry the bag for them in the form of the stock going to zero and eventually being delisted from the market.
Not sure this applies here as it was a private buyout meaning that there would be no stock to short.
They could have shorted it before the buyout to get a better deal, but the banks didn’t buy it the just lent the money.
Well, I mean, banks kind of ‘invent’ the money which they hand out as loans…so what do they care, really?
When the pile of bad loans gets to big, they sell those bundled as loot boxes to other banks. When that pile starts stinking too much, they are too big to fail and get bailed out. That’s the circle of life 🪇🎶
Welcome to the house of cards that is globalisation and capitalism.
landlords might have got some money but still not all.
This is assuming that the landlords aren’t also the private equity companies as well. So far as I can tell in long term care/assisted living/skilled nursing facilities, the same parent company owns everything, but the food branch is separate from the nursing branch, is separate from the physical rehabilitation branch, is separate from the admin services, and since they are all separate from the building branch, they are all operating “at a loss since” they have employees to pay. All the money goes to the building branches and everyone else gets told to do more with less.
So we make interest illegal and the whole scam falls apart, got it.
and if you do that most of the economy fails because no one wants a bond that does nothing
The current economy sucks anyway. Houses as investments, line-go-up disposable consumerism, rent-seeking, it’s all fucked if you aren’t born on top.
Sadly the only way is a lot more Luigi’s. If more CEO’s start getting wigged off maybe they’ll lobby for change.
Just sad that most people have it just good enough to not want to risk prison forever to murder someone, although if I could get away with it I’d have no issue in pulling the trigger on these ghouls.
Companies are valued by earnings-per-share, independent of the assets. So if the P/E ratio is too low the company costs less than its assets and it pays off to sell the parts.
https://en.m.wikipedia.org/wiki/Price–earnings_ratio
In this case I heard a rumor that Amazon did it to dominate the toy market, so losses could have been acceptable.
IIRC it was Mitt Romneys firm that did it to (technically after he left leadership, if i recall)
Impossible! Mitt Romney is one of the good conservatives!
/s because tens of millions of liberals actually believe that it’s true.
He is one of the ones who actually wants a functioning government.
Just saw this after making my comment. I believe it was.
Bain Capital
Not technically, it was years after he left Bain.
Look up Cellar boxing, you’ll see all the companies that were driven out of business because of this strategy
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Truer now than when Henry Ford said it like a hundred years go.
The SEC exists to shelter Self Regulating Organizations from any threats of democratic governance or law enforcement. Oh ya and to keep up the legalese charade that there literally is no such thing as counterfeit stock (because the Secret Service has purview over counterfeiting for some strange reason)
Fuck the stock market 🖕
The Secret Service has purview over counterfeiting because that’s what it was founded for. More confusing is why they became the presidential protection service from there.
Wasn’t it Bain Capital (Mitt Romney’s old place of work), or am I misremembering?
Yes, that was one of them.
From OP
Basically, the company had to pay for its own buyout when private equity firms KKL, Vornado, and Bain bought the company for $6.6 billion, mostly with loans.
Ah, I skimmed it and must have skipped over that
It’s cool. My intention wasn’t to call you out.
In a sane world that would be life in prison illegal.
Sadly we live in crazy town.
Wait until you hear about using shorts to drive a company out of business or stock buy backs.
Its best to plan to not have a retirement fund. Plenty of communities just take care of each other instead.
I’m not sure what you mean. We have a state pension tied to the stock market.
I also have a private pension too. I don’t see how not planning for retirement can be beneficial?
The UK state pension is largely a Ponzi scheme, no? Those paying tax now fund those receiving pensions now with some promise that they’ll get returns in the future. The only difference is it’s backed by the currency issuer and they’re pretty up front about it.
I don’t know that I would call it a Ponzi scheme, although I could argue for it based on current trends.
Basically, the everybody pays in to the state pension with the understanding that it pays for retired people. So yes people paying in now are covering those that have retired.
The thing is now though is that birth rates are not keeping up with retirements, understandably as why would you have a child in this shit hole, so that means each year it’s harder and harder to pay for the pensioners.
The above is incredibly funny when you look at this silly anti immigration rhetoric, we need more immigration to sustain old people not less. These fools will be shocked when they ban immigration and retire and the state is like yeah we got nothing.
What’s worse is it isn’t means tested which I would support but many older people don’t as they see it as they paid in expecting it back where I see it as paying in to support those that need it.
So I have two bosses one is amazing and very progressive and has never done wrong by their 6 employees. The other is not so much progressive and is soon to retire. He is selling his house for £500k, has lots in savings already and is taking his state pension because, and I quote “ I paid in so it’s mine”, now I can’t fathom this behaviour as I don’t want more than I need and would happily not take money if I can support myself.
Alas, these are the people that vote so we are fucked.
This is one of those situations where it once again shows that:
- Private equity stakes in companies are bullshit and at the very least need to be utterly regulated to hell and back.
- More specifically, it should not be allowed to buy a company “on debt”. If you want to buy somebody, you need cash-on-hand to do that. That’s the only allowed form.
Selling property to rent it back should also be super illegal. Is there ever a time this makes sense. If you want to sell land to profit, close the fucking place, there’s no way it’ll suddenly be more profitable while renting.
Not defending PE, but there are situations where this type of thing would make sense. If the rates were low enough a company could cash out it’s property value using something like this and use the cash for an expansion, to make a moonshot investment, or maybe as a last ditch to survive in a downturn.
That’s not what’s happening here, but turning real assets to cash through debt to then invest in the business is a decent tactic.
I see your point, though I don’t know of an example (they’re doing it with Hospitals now too).
Still if you have so many locations that you have enough capital in their land, it seems like closing the locations that you’d sell would make a moonshot more likely to succeed.
the government rarely wants to incentivise direct job loss
It would make sense for me to sell my apartment and rent it back because I get fucked by ODSP if I take a roommate while I’m an owner and I can’t afford to live here alone.
It would make sense for an entity that needs to make use of their equity for other things. Many many individuals and companies mortgage their properties or get secured loans. That’s basically the same thing.
it should not be allowed to buy a company “on debt”. If you want to buy somebody, you need cash-on-hand to do that. That’s the only allowed form.
A company is not somebody, it’s a thing, like a home or a car that you have no problem getting a loan to pay for. Or maybe it’s special because we’re talking about a means of production? C’mon. Say it. Say “means of production.”
No, no companies are people. Buying and selling them is slavery.
The Supreme Court said corporations are people enough to be protected by the first amendment.
The Supreme Court can say the moon is a person and the sun is God. It can decide what entities it will extend the protection of rights to, but it cannot redefine what a person is outside of its own technical jargon.
Citizens United has entered the chat
The very first words of US law:
1 U.S. Code § 1 - Words denoting number, gender, and so forth
…the words “person” and “whoever” include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals;
Okay? That’s a definition that only has scope within that specific document and those it governs. Plus, it’s a definition of two entirely different words.
If we had a strong reform minded government, our leaders could oppose these parasites, and then make examples out of those that mistreat our productive companies. Like which of these private Equity douchebags can’t be hit with a crime for something or another? Not a single one, you can get everyone with the tax evasion charges.
We need leaders that protect us from these monied parasites.
The fact that they can buy a company by going into debt and immediately transfer the debt to the company is fucking insane. Maybe we need to figure out how we as individuals can do that and just fucking crash the lending industry entirely? Can I make my house buy itself for me and then “whoopsie, the house can’t pay the bills, guess it will file for bankruptcy and hand me a big ol’ stack of cash”.
That’s how landlords work.
Take loan, buy houses, house has to pay back loan via rent, rent is paid for by renter.
Landlord gets house for free, everything paid by renter.
And the same thing happens to banks for people with mortgages.
the same happens to most mortgages, namely income goes to the lender and you get a house.
I’m not going to say exactly what it would take, but it rhymes with Bolotov Cocktail
I couldn’t possible know what you mean, but that sounds delicious.
Justice often is.
I use fireball in mine. So the revolution will smell like cinnamon.
They will never, ever give us equal rules willingly. The only way that’s going to happen is if we build a new financial system, immune to their Pinkertons and police.
Yeah, this is the case for most “public to private” company moves, and other types of private equity acquisition deals. They are all just a massive shell game to liquidate a company’s value and transfer it to those private equity companies. Vulture Capitalism
Comical to read this when I just saw a $50 billion dollar sale of EA going private being bought by private equity firms, haha.
My first thought as well. Of companies to lose to further “investor” shittery, I can’t say I’ll lose much sleep over EA if that turns out to be the case.
EA was down the path of being awful, long before that. But yeah…
I was guessing that it was going to be leveraged as a propaganda outlet given the Kushner and Saudi connections, but it does seem more likely that it’ll just be hollowed out and thrown away.
If EA gets bled dry by private equity, it’ll probably be the biggest company to go down that way ever.
Not Sears?
I don’t really know if that’s the same kind of animal though. The Saudi royal family is trying desperately hard to diversify. Into as many different revenue streams as they can. You know to Stave off the coming disaster. So I think maybe they’re actually in it for real with EA, though why you bank on a video game company being a long-term investment I’m not 100% sure. Point is they have so much money now I doubt it’s for a quick profit. They have so many projects right now that are so risky they’re basically burning cash.
When you think about how much money EA’s main soccer title makes from microtransactions alone, it certainly makes sense to buy them out
Assuming the Saudis buy EA out for 55 billion and earnings don’t change much from now on, they’ll recover the expenses in 9 years.
Death Spiral Financing is one of those things that should be shouted from the rooftops by anyone who wants to spread anti capitalism. It so cleanly displays the evil inherent to the system.
vulture capitalism
No other kind. Every major gain is just made by eating a corpse you don’t acknowledge-polluting the air or putting plastics in all our blood or slopping us with malevolent ux and llm’s.
What will really shift your thinking is finding out that they have done this to almost all the hospitals in the United States, which is part of the reason healthcare costs have skyrocketed.
Hospitals need more to pay their leases, health insurers need to pay more to feed the hospitals machine, premiums go way up/more services restricted/more cost share (copay etc)
If you think it’s shitty that consumers can’t own anything anymore, they stole your wellbeing services while you were bitching about how little is still on Netflix these days
This is enough reasoning to say that capitalism is the single greatest enemy of mankind. The search for endless profit will kill everyone.
A victim of the good ol leveraged buyout which should be fucking illegal right alongside stock buybacks.
And the same thing is happening to hospitals all over the US, which should fucking terrify you.
Yeah but they have Jesus so they’ll be okay.
What’s crazy is that the Catholic hospitals are becoming your best bet.
So you’re kinda right!
Unless you want care they consider morally objectionable.
I don’t want religion anywhere near my medical care, it’s crazy it got to this point
Used to be all hospitals were religious in nature. And don’t conflate Catholic hospitals with Evangelical nut jobs, whole different worlds.
Ex-wife was a sort of surgeon at the local Catholic hospital. Never heard of anyone being denied care on religious grounds. Of course they’re not going to do an abortion, but that’s about it.
Or are a kind of person they consider objectionable.
We should really restrain what private equity can invest in.
Already happened, hospitals, clinics, ambulances, but also housing.
These parasites are going to ruin us all and we are doing nothing about it.
The actions taken by private equity companies seem very similar to those taken by organized crime syndicates when THEY take over a business
Odd, don’t you think?
Like in Goodfellas, cannibalizing their own community. Embezzle and steal everything you can, then torch the place for the insurance.
But in Goodfellas, the owner of the restaurant approaches the mafia and asks Paulie to “be a partner”, so he can get Tommy to stop terrorizing the place AND running up tabs he has no intention of paying.
Imagine some short mafia type with a Napoleon complex walking around the Toys R Us aisles, knocking merchandise off the shelves while harassing kids and their mothers.
I betcha the equity firms approach with a silk tongue and Wall St technobabble jabberwocky. I know those CEO business types, the read their CEO magazines chock full of pseudoscience articles like, for example, determining a personality type via their handwriting style, the hooks and curves of their calligraphy. Corporate astrology, just as gullible to fancy jargon as the proverbial Man Down The Street.
Capitalism is organized crime
Yeah?
Isn’t that the entire thing that private equity firms do? Buy up companies, sell all their assets to the private equity firm, then have them lease it all back for insane amount until it’s bankrupt.
Makes a whole lot of short term profits, destroys the company and it’s employees. No fucks given
Private equity firms are a cancer (amongst many cancers) on humanity
They killed Karstadt this way, V&D, and I bet a bunch of other department stores too.
It wasn’t always this bad. It started out as a way to improve local businesses. The problem is the internet and all the hype
Ummm private equity firms have been evilly destroying companies since the early eighties at least.
I hate to tell you this but private equity has been a problem long before the Internet went mainstream. I think venture capital firms we’re a product of a post-WWII world trying to capture as much wealth as possible during reconstruction. I’d have to check some sources to be sure of that and I’m really not motivated enough to do it.
Don’t see how the internet plays a role in firms purchasing stuff then gutting them for profit.
It isn’t the only company to die this way. Sears was cellar boxed the same as toys r us. It was what was intended for gamestop but the whole wallstreetbets thing happened and prevented it.
The methods that they use to do this are crazy (installing a hostile executive, naked short selling, etc), the fact that they got caught while doing it to gamestop caused some crazy shit to be brought to light, and nearly wiped out the entire market
I live in a place that suddenly became a fucking healthcare desert because of this shit. The local hospital network was bought by vulture capitalists who sold the real estate to themselves and then leased it back to the hospitals, racked up enormous debt almost entirely due to obscene bonuses they paid themselves, then declared bankruptcy. The hospitals are all closed now but the vulture capitalists have their cash and still own the real estate. I recently had to spend two days in the ER of a far-away hospital that has been swamped with the overflow, with my mom in a bed in the hallway for the entire fucking time. Muigi Langione is the thing to do.
Time to kill private equity……with crippling regulation and accountability of course
Not when you live in a country where private equity basically owns the government.
Nah just make the rich people pay their taxes. Then they won’t have money for stupid shit like this
Hooray. Back to the slash and burn asset stripping of the 80’s. Isn’t capitalism great?
It’s a PE firm. It’s what they do.
Bloody parasites
PRIVATE EQUITY. PUBLIC ENEMY!
I read something about the birth of these private Equity firms sometime in the late 70s or early '80s when a firm bought out this other productive firm and loaded them up with debt, paid themselves every which way they could, sold off any profitable parts of the company, then declared bankruptcy and stiffed everybody else walking away with a boatload of cash, unemployed workforces, and razed Pension funds.
We have been celebrating this type of behavior for decades now, Behavior I think exemplified in Monty Python’s skits of the pirate building seizing the other buildings like it was a pirate ship.
That was much of the plot of Wall Street.
This has become a common thing. It’s assumed brick-and-mortar is dying due to Amazon and Temu and such. It’s not; they’ve been on that path for a long time, and the companies that were going to die to it have already gone. However, it is a popular perception.
Private Equity gets to use the popular perception as a cover for shady ass shit.
Shopko was a midwestern chain of department stores. In their final years, they typically staffed like three people for the whole store. It’s not as big as a Super Walmart or anything, but it’s a sizable store in any case. They had one person on checkout, one in customer service, and one more running around the rest of the store. Maybe one or two more, but suffice it to say, it was deeply understaffed and it felt like it.
Behind the scenes, private equity had been taking out loans against the store’s real estate, gave themselves big bonuses with that money, and left the company as a whole with unaffordable debt. Also, the money being taken out at the register for sales taxes wasn’t actually being paid to the state.
Shopko was murdered. There is a standalone optical division that still operates, but the rest is gone.
