Toys “R” Us stores across Canada are in play as investment firm Fairfax Financial Holdings Ltd. circles the famed retailer of toys and baby products, according to a source familiar with the negotiations.
The Canadian unit of Toys “R” Us Inc. entered into a confidentiality agreement with Toronto-based Fairfax on Thursday that could result in a $300-million deal that allows the business to exit bankruptcy protection and separate from its struggling U.S. parent company.
Other interested investors will have until Monday to bid for Toys “R” Us Canada and its 82 stores that offer thousands of games, toys and other fun items for kids from coast to coast, the source said. If no rival offer emerges, Fairfax stands to take control of Toys “R” Us after making a so-called stalking horse proposal, where an interested buyer obtains approval for a backstop bid of a distressed company ahead of a formal auction.
Toys “R” Us Canada has some valuable real estate, owning 22 of its stores. These properties had an appraised value of about $220-million with stores in Hamilton, Ont., Coquitlam, B.C., and Thornhill, Ont., among the most valuable.
A deal between Fairfax and Toys “R” Us would come after a tumultuous few months of negotiations over whether the beloved brand could survive the rise of e-commerce and debt burdens. The Wayne, N.J.-based Toys “R” Us filed for bankruptcy protection in September in an effort to restructure amid heightened pricing pressures from discount retailers. Its customers were showing an increasing preference for online shopping, casting a shadow over the large footprint of the company’s more than 700 retail locations in the U.S. The company’s US$5-billion of outstanding debt limited its ability to manouevre and invest in growth areas of the business.
Fairfax did not immediately respond to a request for comment on the deal.
While the Canadian division, which makes up about 7 per cent of global sales, was profitable and independently running its merchandising, planning and purchasing systems, it was not immune from the company’s struggles. The business, incorporated in 1983, was granted creditor protection in the Ontario Superior Court soon after the U.S. bankruptcy-protection filing.
Then, after a disappointing holiday season, Toys “R” Us said it would liquidate its U.S. and U.K. operations while keeping more profitable locations in Europe and Asia Pacific going – these later geographies make up about 33 per cent of sales. The Canadian operations continued operating as usual amid the uncertainty.
Billionaire founder and chief executive of MGA Entertainment – maker of Bratz and Little Tikes toys that relies on Toys “R” Us for a significant portion of its sales – had been campaigning to rescue the chain. Isaac Larian made a bid of about US$890-million, committing his own money as well as launching a Kickstarter campaign, to buy a selection of Toys “R” Us stores in the U.S.and Canada, according to a report from CNN Money. Mr. Larian posted the news on his LinkedIn feed expressing continued interest in saving the brand. Both Mr. Larian and other bidders that were interested in buying solely the Canadian business have been rejected, according to reports.
Fairfax is well known for making bets on companies that are struggling or that it believes are undervalued by the market. In 2016, Fairfax scooped up beleaguered sports equipment manufacturer Performance Sports Group Ltd. alongside Sagard Capital Partners LP, the investment firm backed by the Desmarais family’s Power Corp., after other potential bidders failed to improve upon its stalking horse bid. Fairfax has similarly stepped in on out of favour businesses such as Golfsmith International Holdings Inc. and BlackBerry Ltd.
If Toys “R” Us’s Canadian business is saved, the retailer faces tough competitors both online and in-store. Walmart is the largest toy retailer in the country. Toys “R” Us is the second largest player. Other players including Canadian Tire, Mastermind and Indigo and Amazon.com are also taking a bigger bite out of the market.
Online sales are becoming a larger part of Toys “R” Us Canada as growth slows – or in some cases declines – in its traditional brick-and-mortar locations. Still, 86 per cent of revenues came from physical stores in the last fiscal year, according to the company.