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Bankruptcy Games

Isaac Larian has a mission to save bankrupt retailer Toys R Us – and with it, the entire toy industry. The chief executive of MGA Entertainment Inc. in Van Nuys launched a high-profile crowdfunding drive last month with the goal of raising $1 billion to purchase a portion of Toys R Us’ 817 North American stores and associated assets. To accompany the long-shot bid, Larian filmed a promotional video at a Toys R Us location in Woodland Hills. Flanked by dozens of children, store employees and company mascot Geoffrey the Giraffe, he implored viewers to pledge money to the campaign to help “save Toys R Us and more importantly American jobs, over 130,000 of them.” Losing the chain could have a profound impact on Larian’s toy manufacturing business and the toy industry at large. Toys R Us accounted for 15 to 20 percent of domestic toy sales in 2017, according to a report by investment firm Jeffries Group LLC. Jeffries estimates that 10 to 15 percent of those sales may be “forever lost” if the company is completely liquated. “If there is no Toys R Us, I don’t think there is a toy business,” Larian said in statement. While the crowdfunding campaign didn’t reach its lofty pledge goal, it did succeed in generating enormous publicity for Larian’s bid. As news outlets across the country picked up the story, Larian was able to raise enough money through investors and bank financing to make an $890 million offer earlier this month to purchase 274 Toys R Us’ stores in the U.S. and all 82 of its Canada locations. Toys R Us reportedly rejected the bid because it failed to exceed the liquidation value of its assets. The company later agreed to sell its Canadian stores to Toronto-based investment management firm Fairfax Financial Holdings Ltd. for $300 million. Despite the setbacks, Larian said he’s still interested in the U.S. stores and expects to “continue to participate in the bid process, so we can keep fighting to save Toys R Us.” Perry Mandarino, head of restructuring at B. Riley Financial Inc. in Woodland Hills, said Larian’s offer likely differs from those of other bidders. To resuscitate the Toys R Us brand, it’s possible Larian is seeking to acquire the company’s remaining product inventory, technology and real estate holdings, in addition to its retail spaces, he said. This could drive up the total asking price for Toys R Us’ assets. Mandarino added that he doubts other investors are interested in completely saving the U.S. stores from liquidation. “It would be surprising to me if anyone else would try to re-organize a group of retail stores,” he said. “But I can see someone buying the (Toys R Us) intellectual property rights and starting an online business and then maybe a brick-and-mortar business down the road.” Lost magic In 2005, Toy R Us negotiated a $6.6 billion leveraged buyout by three private investment firms that saddled the company with $5 billion in long-term debt. The new owners sought to cut costs and renegotiate with creditors to return the company to solvency. Richard Gottlieb, chief executive of industry consulting firm Global Toy Experts, said the chain lost its identity after Toys R Us founder Charles Lazarus sold the company. “(The new owners) didn’t love toys and they didn’t know toys,” he said. “They decided the best way to compete with Target and Walmart was to compete on price. It lost that feeling that you were going to see something that you’d never seen before, something you didn’t expect to see – the magical part of the experience.” To recapture that magic, Gottlieb believes Larian should look to offer a curated selection of quality toys that the big box retailers don’t carry. Even with increased competition from Amazon.com Inc., customers still yearn for the toy store experience and are hungry to discover new products in person rather than online, he said. He added that Larian needs to renovate the aging store facilities if he hopes to draw in customers. “The stores tend to be reminiscent of what they were in the ’90s,” he said. “The parking lots can be oppressing — they have potholes and are lumpy — and the entrances still have that depressing industrial feel.” Smaller toy manufacturers may have the most riding on whether Toys R Us can stay afloat. Jeffries analyst Stephanie Wissink wrote in a note to investors that while large companies such as Mattel Inc. and Hasbro could withstand a full liquidation, independent toy makers rely heavily on Toys R Us for distribution. “Many smaller, growth-oriented brands were disproportionately exposed to Toys R Us, having not achieved distribution across a diversified channel base,” she wrote. “We expect many of these companies to explore sales.” As a veteran manufacturer behind some of the country’s best-selling toys such as Bratz Dolls and L.O.L Surprise Tots, Larian likely understands how to work with small toy makers. “Toys are about experiences, so you’ll have far greater cooperation between retailer and manufacturer to create that experience,” said retail broker Matthew May of the potential acquisition. In addition to putting the focus back on toys, Larian has hinted that he hopes to make visiting Toys R Us about more than just shopping. “We will make Toys R Us an experience in and of itself; a fun and engaging place where families can spend an entire day,” Larian said in a recent press release. “Imagine a mini-Disneyland in each neighborhood.” May, president of May Realty Advisors in Sherman Oaks, said that utilizing Toys R Us’ giant retail spaces to create family or play centers could be an effective strategy to reinvent the company. He pointed to department store chain Kohl’s partnership with discount grocer Aldi to test groceries at up to 10 of its locations as a promising example of a retailer looking to do more with its brick-and-mortar space. “(Toys R Us) stores can be anywhere from 20,000 to 40,000 square feet,” he said. “They have legacy leases and the rents are reasonable, so they have the capacity to subdivide them. You have a number of different ways to make it work.” That’s not to suggest a successful turnaround would be easy. Analysts agree that as Wal-Mart Stores Inc., Target Corp. and Amazon.com continue to dominate the retail landscape, specialty chains need to innovate their business models and find new ways to connect with customers if they hope to survive. For Larian, that means more than adding ball pits or snack bars. It’s about making people feel invested again in the once-beloved brand. “For the first time, someone said to the consumer ‘You’re in this too,’” Gottleib said, referring to Larian’s online pledge campaign. Larian has no track record as a retailer, and it remains to be seen whether he will even win his bid in bankruptcy court. Still, Gottleib is optimistic that Larian can revitalize the iconic chain. “I think he’s a good bet to put the toys back in Toys R Us,” he said.

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