Closure of Toys 'R' Us US stores puts 33,000 jobs at risk

Bankrupt Toys ‘R’ Us is preparing to sell or close all 885 stores in its US chain, risking up to 33,000 jobs, after failing to reach a deal to restructure billions of dollars in debt, a person familiar with the matter said on Wednesday.

With shoppers flocking to online platforms like Amazon and children choosing electronic gadgets over toys, the company has struggled to service debt from a $6.6 billion leveraged buyout by private equity firms KKR & Co and Bain Capital and real estate investor Vornado Realty Trust in 2005.

Toys ‘R’ Us had been closing one-fifth of its US stores as part of efforts to emerge from one of the largest ever bankruptcies by a specialty retailer.

But creditors decided they can get more from liquidating assets of the toy seller, the largest in the United States and one of the best known in the world, rather than finding a way to keep the business alive, the person said, speaking on condition of anonymity to discuss the private negotiations.

A Toys ‘R’ Us spokeswoman declined to comment.

The company is expected to make a filing with the bankruptcy court late on Wednesday, the person said.

The planned closure in coming months is a blow to generations of consumers and hundreds of toy makers that sold products at the chain, including Barbie maker Mattel, board game company Hasbro and other large vendors such as Lego.

In Britain, the remaining 75 Toys ‘R’ Us shops will close within six weeks, joint administrators for the retailer said earlier on Wednesday, after they were unable to find a buyer for all or part of the business, resulting in the loss of about 3,000 jobs.

The Wall Street Journal earlier on Wednesday reported that Toys 'R' Us Chief Executive David Brandon told US staff about the likely closures on a conference call.

Efforts to restructure collapsed this month after lenders decided, absent a clear reorganization plan, they could recover more by closing stores and raising money from merchandise sales, sources with knowledge of the matter said.

“It’s a relentlessly difficult retail environment for mall-based retailers. There just aren’t the same feet coming through the doors,” said Brian Davidoff, a financial restructuring lawyer.

More than 8,000 US retail stores closed in 2017, roughly double the average annual store closures in the previous decade, according to data from the International Council of Shopping Centers.

Toys 'R' Us is also likely to liquidate in France, Spain, Poland and Australia, Mr Brandon said, according to The Wall Street Journal. It quoted Mr Brandon as adding that the retailer also planned to sell operations in Canada, Central Europe and Asia.

Toys ‘R’ Us was already working with liquidators Tiger Capital Group, Great American Group, Hilco Merchant Resources and Gordon Brothers Retail Partners on previously announced store closures, and the four are expected to continue with the additional closings, sources said.

The future of the retailer’s big-box shops, many located in strip centres, was uncertain.

The disappearance of Toys ‘R’ Us in the US and the UK leaves a void for hundreds of toy makers that relied on the chain as a top customer alongside WalMart and Target.

Shares in Mattel, the world’s largest toymaker, and number two US toymaker Hasbro tumbled last week on liquidation reports. Both companies rely on Toys ‘R’ Us for roughly 10 per cent of their revenues, according to their 2016 annual reports.

The liquidation will be more painful for small, independent toy makers that relied on the chain as a major showcase, said Lutz Muller, president of consultancy Klosters Trading.

“A large number will go to the wall,” Mr Muller said.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”