In 2004 I was working for a Retail/Consumer portfolio and I remember a bunch of sales people calling and telling us to buy Toys R Us. I told every one of them that the business was garbage and it wasn't going to be around in 5 years and they all said "forget about the toys business, it's a REIT on steroids" - the calls were coming out of their Real Estate not Retail analysts - they were valuing the business on the basis of it's real estate holdings, not it's operations. The thinking was TOY would restructure and close a shit ton of stores or shut down altogether and other big box retailers would be leasing all those stores. We still didn't like it - how many Toys R Us stores don't already have a Best Buy within 5 miles?
At the time, Toys R Us already had a massively bloated balance sheet with old, inefficient stores, antiquated systems, a terrible online shopping experience and no products other than toys. They did have Babies R Us but that business was getting hit by Buy Buy Baby (which, as a part of Bed, Bath & Beyond is essentially now also bankrupt thanks to Amazon). They had a business model that relied on about 30 days between Thanksgiving and Christmas to turn a profit because they lost money every other month of the year. Walmart was already eating their lunch because Walmart could double or triple their in-store Toy offerings for 2 months a year then re-allocate that space to other products 10 months a year and undercut Toys R Us on price. Toys R Us simply couldn't price match and be profitable. In case you didn't read past the first paragraph, Matt Levine doesn't mention TOY was already struggling mightily in 2005 in his article - he doesn't talk at all about the shape the business was in prior to the LBO.
So along comes Bain, KKR and a Real Estate company - probably their biggest leaseholder - and they buy the company, cut costs, streamline operations, updates systems, update stores, close others, improve their online presence, etc and kept the business alive well past the point anyone thought possible. But it was still very iffy and then Amazon who doesn't have to dedicate any retail space at all to the same products, goes after the business aggressively and between them and Walmart, it's simply game over - they can't compete no matter what Matt Levine says. Toys R Us operations were profitable BECAUSE private equity came in and restructured it - they wouldn't have made it past 2008 without it and all those employees would have lost their jobs a full decade sooner. Maybe you (and Matt Levine) think if the workers controlled the stores instead of private equity, they could have restructured it without any debt - through the magic of the collective, perhaps...
It may not have worked out for Bain, KKR and Vornado - it's a private company so who knows what value they got over 13 years, but the idea that Toys R Us failed because of private equity is simply absurd, you have to be an idiot to believe that.
