Report: Toys R Us Narrows Buyers Field

NEWARK, N.J. – Although Toys R Us Inc. (TOY), the nation's second biggest toy retailer, has reportedly narrowed the field of potential buyers of its toy operation to four groups, analysts said Tuesday they believe that most of the toy stores will be preserved.

The industry observers have waited a half-year so far to see exactly how the company will separate its burgeoning Babies R Us (search) business from the struggling toy segment.

Total liquidation of the toy business is unlikely, said Sean P. McGowan, an analyst at Harris Nesbitt.

"The company is not acting as if all these stores are going to be mothballed," McGowan said Tuesday, adding that Toys R Us (search) representatives worked "very, very diligently" at last month's American International Toy Fair (search) in New York to obtain exclusive items that will not be on the shelves until November.

Chris Byrne, an independent consultant, said that "the Toys R Us brand is incredibly powerful with parents."

"For mom, who needs to get a toy for a birthday party tomorrow, her default response is to go to Toys R Us, and that's the power of a brand and the confidence in the marketplace," Byrne said. "It's still an iconic American brand."

Their comments came after The Wall Street Journal reported Tuesday that Wayne-based Toys R Us is pressing the four finalists to sweeten their offers. The newspaper, citing unidentified people familiar with the matter, said the groups have offered $3 billion to $3.5 billion for the unit. The newspaper said the price was at the high end of what analysts expected for the global toy store chain.

The toy business has been hurt by price cutting from the big discount chains such as Wal-Mart Stores Inc., the nation's biggest toy seller.

Although Toys R Us has 685 toy stores in the United States, and 603 overseas, the 216 Babies R Us stores have more profitable.

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.

In that fiscal year, sales at Babies R Us stores open at least a year rose 2.8 percent, while sales at domestic Toys R Us stores open at least a year fell 3.6 percent.

Results for fiscal 2005 are to be released March 17.

The Journal identified the four remaining bidding groups as buyout specialists Kohlberg Kravis Roberts & Co.; a partnership of Apollo Advisors LP and Permira Advisors Ltd.; an alliance between Bain Capital LLC and Vornado Realty Trust; and a group that includes Cerberus Capital Management LP, Kimco Realty Corp. and Goldman Sachs Group Inc.

The Journal said representatives for Cerberus, Goldman, KKR, Vornado and Bain declined to comment. It said Kimco and Apollo didn't return calls seeking comment.

Reached Tuesday by The Associated Press, Apollo, Vornado and KKR declined to comment. Calls to the others were not immediately returned.

Toys R Us spokeswoman Susan McLaughlin said Tuesday, "We do not comment on marketplace rumors or speculation."

The company has made no further statements on its course since its stunning August announcement that it was going to split Babies and Toys R Us. In a January discussion of holiday sales, CEO John Eyler again said he expects the company to finish by July its evaluation of how to restructure, after which the company's board of directors will decide what steps to take.

"The strategic review is designed to ensure that, irrespective of ownership, our business model is one to ensure viability," Eyler said.

While the review continued, the company warned that financing costs could rise. Its $2.3 billion in long-term debt is labeled at below investment grade by three credit rating agencies, all of which warn that the rating could fall farther.

Despite the uncertainty, neither consumers nor investors have abandoned Toys R Us, a public company since 1978.

Since August, Toys R Us stock has wandered upward. It rose 13 cents to $23 Tuesday on the New York Stock Exchange, beating its 52-week high by a penny.

And while its holiday sales slumped 1.4 percent compared to a year ago, it may have gained some market share because of discounts and selection.

Toys R Us has also taken steps to keep some of its top people, dangling bonuses of up to twice their salaries if they stay aboard during the restructuring.

Among those agreeing to stay on through at least Jan. 31, 2007, were president John Barbour, chief financial officer Raymond L. Arthur and vice president for human resources Deborah M. Derby, according to a Feb. 14 filing with the Securities and Exchange Commission.

Even before the August restructuring announcement, the company began to reshape itself. It shuttered 182 Kids R Us and Imaginarium stores in early 2004, cutting about 3,800 U.S. jobs. In 2003, it consolidated five offices in New Jersey into one in Wayne.