Toys "R" Us sets sights on Asian market amid North American bankruptcy
Toys “R” Us Inc., the retailer that filed for bankruptcy in North America, has been exploring options for its growing Asian business, including a potential initial public offering, people with knowledge of the matter said.
The U.S. chain and its local joint venture partner, the billionaire Fung brothers, have been speaking with investment banks to study the feasibility of listing the Asian business on the Hong Kong bourse, according to the people. A deal could value the unit at as much as $2 billion (U.S.), the people said, asking not to be identified because the information is private.
Toys “R” Us and some of its North American subsidiaries filed for bankruptcy last month, though its Asian unit wasn’t included in the proceedings.
Deliberations are at an early stage, and Toys “R” Us hasn’t decided which path to pursue, the people said. Toys “R” Us owns about 85 per cent of the Asian venture while Fung Group, the private holding company of Hong Kong businessmen Victor and William Fung, holds the remainder.
The ongoing bankruptcy could make a listing more complicated and harder to market to investors. Still, an IPO of the Asian unit would allow Toys “R” Us’s private-equity owners to recoup some of their investment by selling shares in a business that’s still doing well.
“Throughout Asia, income levels are rising and the consumer is trading up to more higher-end toys,” Thomas Jastrzab, a Hong Kong-based retail analyst at Bloomberg Intelligence, said by phone Tuesday. “In Asia, you should see faster growth in the toy market compared to Western Europe and North America.”
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Toys “R” Us dominates the $20.7 billion Asia Pacific market for traditional toys and games, according to consultancy Euromonitor International. It had a 20-per-cent share of last year’s sales of dolls, action figures, puzzles and other products that lack a video-game component. Its closest competitor in the region had a 1.4-per-cent share, the Euromonitor data show.
Growth in Asia Pacific helped offset weaker sales in the U.S. and Europe in the quarter ended April 29, Toys “R” Us said in June. Earlier this year, the company combined its Japanese business with a joint venture running stores in greater China and Southeast Asia. The merged business operates more than 400 outlets, according to its website.
The toy retailer’s owners had initially discussed the feasibility of listing the Asian business as early as 2018, but some parties view that timeline as too ambitious because of the complexities related to the bankruptcy proceedings in the U.S., the people said.
Representatives for Toys “R” Us and its owners, KKR & Co., Bain Capital and Vornado Realty Trust, declined to comment. A spokesperson for Fung Group also declined to comment.
A listing could provide a boost for Hong Kong, where fundraising from first-time share sales this year has fallen 42 per cent from the same period in 2016, according to data compiled by Bloomberg. The city’s market for IPOs is heading for its worst year since 2012 as megadeals including an offering from state-owned China Tower Corp. are pushed to next year.
KKR, Bain and Vornado acquired Toys “R” Us in a $7.5 billion leveraged buyout in 2005. They stand to have their investment erased as the retailer, which has 1,600 stores across dozens of countries, seeks bankruptcy protection after competition from online rivals and price wars made it difficult for the company to service its debt. KKR and Vornado had previously written their investments in the company down to zero.
Toys “R” Us Asia was set up in 1986. Local partner Fung Group is also the biggest shareholder in Li & Fung Ltd., a supplier to U.S. retailers including Wal-Mart Stores Inc.