Acquisition of Toys “R” Us by Vornado Realty Trust, Bain Capital and KKR
Company Details
Target – Toys “R” Us, Inc. (“Toys “R” Us”)
The target of this landmark leveraged buyout, Toys “R” Us, originates from 1948 when founder Charles Lazarus established Children's Bargain Town, which initially just sold baby furniture, which eventually graduated to selling children’s toys. It was later rebranded to the iconic Toys “R” Us name in 1957. This shift was motivated by shifting the perception of the company, as the name “Children’s Bargain Town” was deemed to be too generic, and the term “Bargain” would imply lower quality products. Toys “R” Us, on the other hand, represented Lazarus’ vision -- which was to create a supermarket for toys. By the time of the 2005 transaction, the company was led by CEO John Eyler, with a market valuation of $6.6 billion, representing an enterprise value of $26.75 per share. Operating within the speciality toy retail sector, the company championed a corporate mission to become "the world's greatest kids' brand" through its pioneering "category killer" superstore format that offered unparalleled breadth of toys, baby products, and children's apparel.
Toys “R” Us had undergone a dramatic evolution over the decades. From its 1950s origins as a baby furniture retailer, it transformed into a dominant force in toy retailing by perfecting the supermarket-style superstore concept. The 1980s and 1990s marked a period of aggressive expansion, growing to over 1,450 stores worldwide while diversifying into the Kids “R” Us clothing chain and the highly successful Babies “R” Us format.
However, the turn of the millennium exposed fundamental strategic vulnerabilities. Between 2000 and 2005, the company faced severe financial deterioration as Walmart and Target engaged in harmful price competition and Amazon revolutionised e-commerce toy sales. This pressure manifested in a 3.8% decline in same-store sales during 2004 alone. The company had failed to integrate its online and offline channels, and was maintaining unsustainable operating costs whilst losing critical exclusive toy distribution agreements. Despite these challenges, the company had previously attempted strategic repositioning through the 1997 acquisition of Baby Superstore, which was done to compete with Walmart by expanding it’s portfolio to include baby products. The acquisition was quite successful as the Baby Superstores were converted to “Babies “R” Us” locations. In 1997, sales exceeded $600 million, making Toys “R” Us a leading player in the baby retail market -- Babies R Us remained a strong part of Toys “R” Us’ portfolio up until the mid 2010’s, where online retail displaced its once dominant position. In 2000, Toys “R” Us realised that it would not be able to operate a strong e-commerce division on its own, so it reached a strategic agreement with Amazon, where Amazon would exclusively sell their toys. The partnership broke down in 2004 due to Amazon breaching the agreement by selling third-party toys. The critical vulnerability for Toys “R” Us is that they did not develop their own e-commerce know-how during the internet boom, leaving them vulnerable. Finally, in 2004, Toys “R” Us closed its underperforming Kids “R” Us division in 2004, which was its discount clothing children’s brand. By 2003, it was reported that it was suffering from a 11.5% decrease in like-for-like sales; the closure worked well in cutting overall costs but signalled to the market that Toys “R” Us was contracting. Overall, despite the success of Babies R Us, by 2004, Toys “R” Us was a company in managed decline. This set the stage for the March 2005 announcement that a consortium of Bain Capital, KKR, and Vornado Realty Trust would take the company private in a $6.6 billion leveraged buyout.
Acquirer: Vornado, KKR and Bain Capital
The acquiring consortium was comprised of three distinct but complementary financial powerhouses, each bringing unique strategic motivations.
Vornado Realty Trust traces its roots to Two Guys from Harrison, a discount department store founded in 1947 in New Jersey that grew to over 200 stores before declining in the 1970s — its very name inherited from a fan manufacturer it acquired in 1959. In 1980, real estate developer Steven Roth seized control of the company through a proxy fight, not because he wanted the retail business, but because he recognized the land beneath the failing stores was worth more than the stores themselves — a playbook he repeated by acquiring and converting the struggling Alexander's department store chain into a REIT as well. After formally restructuring the company as Vornado Realty Trust in 1993, Roth parlayed those former retail properties into one of Manhattan's most powerful commercial real estate empires, growing the company's share value roughly 17-fold. This history explains Vornado's interest in the Toys "R" Us buyout: for a firm built entirely on extracting real estate value from dying retailers, a toy chain that owned hundreds of big-box store locations was a familiar kind of opportunity.
KKR — founded in 1976 by Jerome Kohlberg, Henry Kravis, and George Roberts after they left Bear Stearns — was the architect of the deal's financial engineering. The firm had essentially invented the modern leveraged buyout, and its participation in the Toys "R" Us acquisition was a direct descendant of the playbook it had refined over three decades. KKR's most famous transaction was its 1989 acquisition of RJR Nabisco for $25 billion — at the time the largest leveraged buyout in history, a deal so dramatic it became the subject of the bestselling book and HBO movie Barbarians at the Gate. In that deal, KKR financed 87% of the purchase price through debt, putting up only about $3.2 billion in equity against over $21 billion in borrowed money. The logic was straightforward: by using the target company's own cash flows to service the debt, KKR could control a massive enterprise while risking relatively little of its own capital. If the company performed well enough to pay down the debt, the equity holders — KKR and its investors — would capture enormous returns on their comparatively small investment. KKR thus saw Toys "R" Us as a classic LBO candidate — a globally recognised brand with steady cash flows and an undervalued stock price that could be taken private with 80% borrowed money, restructured for efficiency, and flipped back to public markets or a strategic buyer within five to ten years.
Bain Capital, founded in 1984 by Mitt Romney as a spin-off from the management consulting firm Bain & Company, brought a different set of skills to the consortium. Where KKR was the financial engineer, and Vornado was the real estate opportunist, Bain's speciality was operational restructuring — getting inside a business, diagnosing what was broken, and applying consulting-style methodology to cut costs and improve margins. The firm's model was to partner with existing management rather than pursue hostile takeovers, buying companies with mostly borrowed money, applying the Bain playbook to their operations, and selling them off within a few years. By 2005, Bain had invested in over 230 companies, including well-known consumer and retail brands like Staples, Burger King, Domino's Pizza, and Dunkin' Doughnuts. Bain Capital, which had already watched one toy retailer — KB Toys — collapse under its debt-loaded ownership just a year earlier, brought its consulting-rooted operational playbook to the deal, betting it could squeeze higher margins out of Toys "R" Us through cost cuts, private-label expansion, and supply chain efficiencies fast enough to service the buyout's massive debt and exit at a profit before the competitive landscape shifted further.
The Acquisition
The transaction represented a classic leveraged buyout, converting Toys R Us from a public to private entity through a consortium acquisition. while Bain Capital itself had already accumulated a 3% stake. In the data room they split the job three ways.
Vornado's interest was in real estate, not the toys. By 2005, Toys "R" Us owned roughly 75% of its store buildings outright, most purchased in the 1980s when property was far cheaper — meaning the company was sitting on real estate worth significantly more than what its books reflected. Vornado's plan was to execute sale-leasebacks: sell those buildings to outside investors for around $1.1 billion, then have Toys "R" Us lease the same spaces back and keep operating as normal. That cash alone would be enough to repay the buyout's senior debt, while still leaving Vornado with a strong return on its $400 million share of the deal — profit generated almost entirely from unlocking hidden property value, regardless of whether the toy business itself ever improved.
Bain took the lead on day-to-day operations out of Toys "R" Us's headquarters at 1 Geoffrey Way in Wayne, New Jersey. It initially retained John Eyler as CEO — the former FAO Schwarz chief who had been running the company since 2000 and who was compensated $65.3 million upon the buyout's completion — and installed its own people alongside existing management to implement the consulting-style operational overhaul that was Bain's signature. Having just watched KB Toys implode under its ownership barely a year earlier, Bain understood the toy retail margin structure intimately: branded toys carried thin margins that were being squeezed further as Amazon and Walmart used toys as loss leaders, so the path to profitability ran through higher-margin private-label and exclusive products. The plan centred on shifting shelf space toward cheaper private-label baby gear through Babies "R" Us — which, despite accounting for only about 15% of the company's $11.6 billion in sales, was already generating roughly three-quarters of its operating income — while cutting overhead, closing underperforming locations, and tightening supply chain costs. The target was to push EBITDA margins from around 14% up toward 17%, which, combined with Vornado's real estate sale-leasebacks and KKR's debt structuring, was projected to deliver a strong return on the consortium's relatively modest equity investment even if top-line toy sales continued their downward slide. In practice, however, most of the available cash went to servicing debt rather than reinvesting in the business — the company was spending over $400 million annually on interest payments alone, more than it spent on its stores and website combined — and the margin improvements never materialized at the scale needed to overcome the financial albatross the buyout had created.
KKR managed the deal's capital structure, applying the same heavily leveraged financing formula it had pioneered on RJR Nabisco. The consortium put up roughly $1.3 billion of their own money while borrowing approximately $5 billion and placing that debt directly onto the Toys "R" Us balance sheet — on top of the $2.3 billion the company already owed — bringing total obligations north of $7 billion. KKR assembled what's known as a layered debt stack, meaning it borrowed from multiple sources at different levels of risk and priority: a $700 million senior secured credit facility (a revolving line of credit backed by company assets that gets repaid first if things go wrong), a $1.9 billion unsecured bridge loan (short-term borrowing intended to be refinanced later, with no specific assets pledged as collateral), a $1 billion secured European bridge loan (similar temporary financing backed by the international operations), and an $800 million mortgage loan (borrowing against the value of Toys "R" Us's owned real estate). Crucially, all of this debt was "recourse to the company" — meaning Toys "R" Us itself, not the buyers, was legally on the hook for repayment. This is the core mechanic of a leveraged buyout: the buyers use the target company's own assets and future cash flows as collateral to borrow the money needed to purchase it, so if the business fails, the buyers lose only their equity while the company and its creditors absorb the losses. In practice, this meant Toys "R" Us was spending over $400 million a year just on interest payments — money that couldn't go toward new stores, website improvements, or competing on price — while KKR, Bain, and Vornado's maximum downside was capped at their $1.3 billion equity contribution.
The deal unfolded across a tightly compressed timeline. Initial announcements emerged on 17 March 2005, with definitive agreements signed by 24 May. Shareholders overwhelmingly endorsed the transaction on 21 July 2005, with 99.6% voting in favour, enabling same-day completion. The financial engineering proved ambitious even by private equity standards of the mid-2000s
Legal & Regulatory Contentions
The transaction navigated a complex regulatory and legal landscape, though ultimately faced less scrutiny than its scale might have suggested. The Federal Trade Commission (FTC) conducted its mandatory antitrust review under the Hart-Scott-Rodino Act, unconditionally clearing the deal on 20 July 2005. Any acquisition of this size required regulatory clearance under the Hart-Scott-Rodino Act, which mandates that parties to large mergers and acquisitions file premerger notifications with both the Federal Trade Commission (FTC) and the Department of Justice's Antitrust Division, then observe a waiting period while regulators assess whether the deal would substantially lessen competition. The primary concern in any antitrust review is horizontal competition — whether the acquiring entity already operates a competing business in the same market, which could lead to reduced consumer choice, higher prices, or monopolistic behavior. In a typical retail merger — say, if Walmart had tried to buy Toys "R" Us — regulators would scrutinize overlapping store footprints, combined market share, and the potential for the merged entity to dominate pricing in the toy sector.
The Toys "R" Us deal presented a different picture. None of the three acquirers — KKR, Bain Capital, or Vornado — were toy retailers. They were financial sponsors: a private equity firm, a consulting-rooted investment firm, and a real estate investment trust. Since the buyers didn't operate competing stores, there was no horizontal overlap that would reduce competition in the toy market. The one wrinkle that analysts flagged at the time was Bain Capital's existing stake in KB Toys, then the nation's second-largest toy retailer (which was already in bankruptcy). However, KB Toys' shrinking market share — it had lost more ground in recent years than Toys "R" Us itself — and its mall-based format, which was fundamentally different from the Toys "R" Us big-box model, appear to have satisfied regulators that the overlap posed no meaningful competitive threat. Both Eyler and industry analysts publicly stated they expected no impediment on the antitrust front. The FTC ultimately cleared the transaction without requiring divestitures or imposing conditions, and the deal closed in July 2005 as planned.
More substantive legal challenges emerged through shareholder litigation in the Delaware Court of Chancery, consolidated as In re Toys "R" Us, Inc. Shareholder Litigation. Plaintiff shareholders — Iron Workers of Western Pennsylvania Pension and Profit Plans and Jolly Roger Fund LP — alleged breaches of fiduciary duty by the board under the Revlon doctrine, the landmark Delaware ruling requiring directors selling a company to seek the best price reasonably available for shareholders. They argued the purchase price of $26.75 was inadequate, that the sale process had been improperly narrowed when Credit Suisse First Boston initially steered bidders toward buying only the toy division while ignoring eleven parties interested in the whole company, and that CEO John Eyler faced a personal conflict given his $65.3 million payout and the KKR consortium's desire to retain him. The plaintiffs further contended that the deal's protection measures — a $247.5 million termination fee, a $30 million expense reimbursement, a no-shop clause, and a matching right allowing the KKR group to match any rival bid — collectively deterred competing offers and locked the board into an unfavourable deal. They also raised concerns about Credit Suisse acting as the board's financial advisor while standing to earn $7 million more from a whole-company sale than from the division-only sale it had originally recommended. On these grounds, the plaintiffs sought a preliminary injunction to block the shareholder vote and prevent the merger from closing. The litigation concluded in December 2005 with a court-approved settlement that provided additional pre-vote disclosures to shareholders while allowing the transaction to proceed unchanged. The settlement included $3.95 million in plaintiff attorneys' fees but imposed no further constraints on the deal's structure or completion.
The transaction operated within a clear legal framework governed by the Delaware General Corporation Law §251 regarding merger approval requirements, the Securities Exchange Act 1934 mandating proxy statement disclosures through Schedule 13E-3, and ultimately revealed ERISA considerations through the identification of $200 million in pension fund underfunding that emerged during post-closing due diligence.
Success
The transaction's outcome presents a stark cautionary tale of value destruction masked by financial engineering success. For the consortium, the financial gains proved substantial and immediate. Between 2005 and 2017, the sponsors extracted over $1.2 billion in combined monitoring and transaction fees. More significantly, the consortium executed dividend recapitalisations — a process where the company takes on additional debt not to invest in the business, but to pay special cash dividends directly to the private equity owners. Through this mechanism, $2.3 billion in special distributions flowed to the sponsors between 2009 and 2014, funded entirely by new borrowing stacked on top of the already enormous acquisition debt. Vornado alone realised over $400 million through sale-leaseback transactions on thirty properties, while KKR and Bain achieved partial exits through debt paydowns and equity distributions. In short, the deal was a financial success for the buyers — they recovered their original $1.3 billion equity investment several times over before the company ever reached bankruptcy.
The consequences for Toys "R" Us proved catastrophic. The company's total debt obligations required roughly $400 million per year in interest payments alone — money that went to banks and bondholders rather than into stores, staff, or technology. Debt service consumed 95% of operating cash flow by 2017, with cumulative interest payments exceeding $5 billion over the LBO's lifespan. This financial burden starved the business of necessary capital, resulting in underfunded store refreshes, a 30% reduction in inventory levels, and the closure of over 200 stores between 2006 and 2017. The company progressively lost its market leadership position, ceding the number one toy retailer ranking to Walmart in 2006 and subsequently to Amazon by 2010. When bankruptcy finally arrived in 2017, the reputational damage proved severe, with Congressional hearings condemning the transaction as "private equity looting."
On 18 September 2017, Toys "R" Us filed for Chapter 11 bankruptcy — a legal process designed to give a struggling company breathing room from its creditors while it attempts to reorganise its debts and continue operating. Under Chapter 11, the company keeps its stores open, employees remain on payroll, and management works with creditors to agree a restructuring plan — typically involving reduced debt, renegotiated leases, and a slimmed-down business emerging as a going concern. Initially, there was hope Toys "R" Us could survive in some form. However, the 2017 holiday season proved disastrous as suppliers tightened credit terms and customers lost confidence, and by early 2018 it became clear the business could not be saved. On 15 March 2018, the case was converted to Chapter 7 liquidation — a fundamentally different process in which the company ceases all operations, a court-appointed trustee sells off every remaining asset (inventory, property, intellectual property, fixtures), and the proceeds are distributed to creditors in strict order of priority. There is no reorganisation, no second chance — the business simply ends. For Toys "R" Us, Chapter 7 meant the closure of all 735 US stores and the termination of 33,000 employees, most of whom initially received no severance until public pressure and Congressional scrutiny forced the sponsors to contribute $20 million to a hardship fund. Overall, the deal must be assessed as a catastrophic failure relative to its stated strategic objectives: while the sponsors extracted billions, the LBO systematically destroyed a seventy-year-old enterprise and left its workforce, suppliers, and communities to absorb the cost.
The buyout consortium gets a huge injection of cash upfront to pay off debt and lock in profits. But Toys "R" Us is now stuck paying rent on buildings it used to own — a recurring cost that eats into margins for years to come. So Vornado and the other private equity firms could walk away with strong returns, while the actual operating business was left in a weaker financial position than before.
This is one of the reasons critics of the leveraged buyout argue the private equity owners essentially extracted value from Toys "R" Us rather than investing in its future.
Future Implications
The Toys R Us collapse has catalysed sustained criticism of the legal frameworks governing leveraged buyouts. Congressional hearings in 2019 specifically targeted "safe harbour" provisions within the Bankruptcy Code that protected private equity fees from clawback in the In re Toys R Us proceedings. Delaware courts' permissive approach to LBO approvals under the Lyondell fiduciary duty standard has faced intense scrutiny, while SEC disclosure rules have been criticised for failing to require forward-looking solvency assessments in Schedule 13E-3 filings for going-private transactions.
These criticisms have translated into concrete legislative proposals. The Stop Wall Street Looting Act of 2019 sought to prohibit dividend recapitalisations within three years of a leveraged buyout, directly addressing the Toys R Us pattern of debt-funded sponsor distributions. Proposed amendments to the Bankruptcy Abuse Prevention Act would enable courts to claw back pre-bankruptcy sponsor distributions, while the FTC announced in 2023 a comprehensive review of private equity roll-up strategies specifically targeting retail sector consolidations. The Toys R Us brand has experienced a fragmented afterlife. Tru Kids Inc., a sponsor-backed entity, acquired the trademark rights in 2019 and now operates two flagship US stores while licensing the brand internationally. Over 900 stores continue operating under separate ownership across Canada, Europe, and Asia-Pacific, creating a geographically disjointed presence. Former flagship locations, particularly the Times Square store, have been transformed into mixed-use developments by Vornado, exemplifying the real estate value extraction that motivated the original transaction.
Ongoing challenges persist. A remaining $200 million pension deficit continues to be litigated in the Southern District of New York bankruptcy court, while brand dilution from multiple international licensors creates inconsistent consumer experiences. Most significantly, the transaction has permanently damaged private equity's reputation, serving as enduring evidence of asset-stripping models that prioritise sponsor returns over enterprise sustainability. The Toys R Us saga has become the definitive case study in how financial engineering can extract massive value while destroying an iconic American retailer.