Basically, the company had to pay for its own buyout when private equity firms KKL, Vornado, and Bain bought the company for $6.6 billion, mostly with loans.
Because the company then had to pay off those extreme loans, they were forced to sell off their assets and property, which they leased back from the very private equity firms that now owned them.
The same thing happened more recently with Red Lobster and JoAnn Fabrics.
I think Kmart and Sears are in this list, too, along with Bed, Bath, and Beyond and even some hospitals. There’s nothing private equity forms won’t do to make a buck at the expense of a once thriving company or even people’s healthcare.
Also Red Lobster.
Often private equity is invested in their competitors. One of the problems of rich people having ungodly sums is they like to “invest” in competitors and sell them for parts so they can raise prices.
Why did they have to pay off the loans that were used to buy them? That’s something the buyer should be responsible for.
should
Yep.
Probably because the C suite assholes who negotiated the buyout agreed to place the burden of the loan on their own company and shaft their employees. It’s basic capitalism, really.
Basic? It seems this kind of wizardry only happens to companies who are in their own kind of abomonative category. I’ve never seen this happen to small to large businesses. They are also capitalism, that doesn’t make sense
The exact workings im not familiar with but it’s called “leveraged buyout” where the net worth of the firm which is bought is the collateral.
So … you buy firm A with money you lended. When the sale gors through all belongings of firm A are yours! So you sell them off, you know what? You want to make a profit so you sell EVERYTHING.
Now firm A is but a husk of it’s former self. So now is the time to put it in some holding company or something. Now the husk of firm A is indebted to you.
Oh noes! It goes bankrupt! With your investment firm as the biggest lender to it!
“Millennials are ruining the [_] industry! How dare they-”
Oh right, it was capitalist greed all along. Excuse me while I shed a tear for your precious local Applebee’s as you keep voting for the people who enable these acquisition monopolies, lmao
I generally feel like leveraged buyouts for numbers into the billions are just inside jobs for those selling.
Stay with me for a sec.
So the seller makes a closed door deal with the “buyer” to funnel money back to them personally after the sale is done. So in this case, say, they commit 3.6bn to the “buyers” and pocket 3bn for themselves. Almost the entire purchase is leveraged, with the expectation that it will become unsustainable and go bankrupt shortly after the purchase.
The buyers don’t really give a shit, they’ll write it off, collect whatever they can from insurance, etc. They didn’t really want to company anyways, so they let it fold.
The money they took home from the deal with the seller is entirely theirs, the company bears the weight of the debt and the consequences of defaulting on the debt, so the execs that made the move are basically free and clear.
Everyone wins, except, you know, the poors who work at the purchased company, the banks, who don’t give a shit, and insurance people, which… Nobody gives a fuck about them…
At the end of the day, the execs of the purchasing company get rich, the sellers get rich, and that’s the fucking point.
If the sellers instead just closed up shop, they would get maybe a fraction of the money they would from selling it, mainly in selling off assets… It would be a pittance compared to this scheme.
All they need to do is find someone they can buy out the morals of, to complete the deal. This is surprisingly easy in the corpo world.
Ok, but who is providing the loans for the buy out. When they default on the debt someone or some thing is not getting paid. If that were the case eventually no company would loan money for a leveraged but out right?
Bear with me for a bit, because i don’t understand these schemes.
If the sellers instead just closed up shop, they would get maybe a fraction of the money they would from selling it, mainly in selling off assets… It would be a pittance compared to this scheme.
How would the sellers get more money from this scheme? Isn’t liquidating company assets are basically what the buyers (the private equity firms) did anyway?
collect whatever they can from insurance
How does the insurance companies keep falling for these? This has happened several times, and insurance companies aren’t known for being charitable.
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Every time I read something like this, it makes me want to burn money.
This kind of buyout should be made illegal.
Back to the good old corporate raiders like Lorenzo. For a while there we kept them on a leash. Now with the Land of No Consequences and leashes becoming meaningless these leeches are free to buy and pillage as they see fit. The housing market is gonna be destroyed next, wait until they start selling the homes off to shell companies and taking loans to pay for the deteriorating properties and property taxes (which trump has floated getting rid of to keep these hoarders afloat even longer).
Should have paid them back in Geoffrey Dollars.
That’s why the Canadian toys r us is doing great.
Too bad we can’t say the same for Sears
TIL: stock buybacks were considered insider trading before Reagan made them legal
Is there anything that Reagan hasn’t fucked?
He died before Epstein Island was a thing, presumably.
Whatever he didn’t got fucked by Clinton.
He did not. Have. Sexual relations. With that. Policy.
“Bill! Get you dick out of the jelly beans!”
Your mom.
Well he better get to work then
The entire investor community is filled with shitbags.
I highly recommend the book, ‘Bad Company’ by Megan Greenwell, which covers this exact topic. Great read.
I watch the YouTube channel “Company Man” that does a bunch of interesting business stories. 95% of the “Decline of (brand)” or “Rise and Fall of (brand)” videos are because of leveraged buyouts.
A group of idiots borrow billions of dollars, throw the unrecoverable debt onto the books, slowly killing the company, and then it’s dead.
Who loans this money? How does that work? I understand the rest of it about being a bastard who collects millions in salary and bonuses while driving a company into the ground. I just don’t understand where the money comes from, or why.
Oh it is real simple. Imagine you have a really nice truck that is all jacked up with a lift, big tires, light bar, supercharger, etc.
I want to buy it and you want $10k for it since it is an older model and most of it’s worth is from the accessories. The problem is I don’t have $10k. I only have $2k.
This is where the magic happens. I find some someone who will buy all your accessories for $8k. I make a deal, let me strip your truck and I will pay you $10k for it.
You agree and I come over, take off all the accessories and then sell them for $8k and then buy your truck for $10k.
The truck is pretty worthless at this point without wheels or anything, but I can sell it for about $3k. Well, I ruined the truck and made a thousand bucks. This is a silly example of how they get the money.
It may be U.S. plutocrat strategy to weaken political enemies by killing their companies.
Consider Microsoft destroying Nokia and their Linux phones to benefit fellow American companies Apple and Google.
Consider the Destruction of OkCupid as an attack against its liberal-skewed user base.
Consider Microsoft destroying Nokia and their Linux phones to benefit fellow American companies Apple and Google.
I’ve considered it, but I do think it was a huge blunder that was planned differently. They invested a bunch of money in Windows Mobile, had a partnership with Nokia and then bought their mobile business… And then they just gave up, handling their competitors in other markets (Apple being a competitor to Windows and Google at the time being already a competitor to Office) a win. I suspect they actually had faith in Windows Mobile and wanted to fuck up Nokia and buy their phone business so they could sell Windows Phones.
The best book I’ve read about private equity is called Songs of Profit, Songs of Loss by Daniel Souleles. It’s an ethnography of private equity.
Private equity is the logical extreme of the idea of shareholder value. Companies are bought, stripped for parts, and mined for resources. The money comes from wealthy people and institutional investors like university endowments, pension funds, etc, and some years it is a very high-return investment. Other years, not so much, see the relationship by the University of California and Blackstone as an example in recent years.
Everything they did was to line their pockets and destroy the company and leave creditors holding the bag. They should ban buying with loans, no taking loans against acquired companies for X years. The sale and leasing of assets back by the same owners stinks.
What will really shift your thinking is finding out that they have done this to almost all the hospitals in the United States, which is part of the reason healthcare costs have skyrocketed.
Hospitals need more to pay their leases, health insurers need to pay more to feed the hospitals machine, premiums go way up/more services restricted/more cost share (copay etc)
If you think it’s shitty that consumers can’t own anything anymore, they stole your wellbeing services while you were bitching about how little is still on Netflix these days
This is enough reasoning to say that capitalism is the single greatest enemy of mankind. The search for endless profit will kill everyone.
Capitalism is a great system as long as it’s regulated. It’s been more and more destructive and caused catastrophic shifts in wealth distribution since deregulation started with Reagan
You’re basically saying cancer isn’t so bad as long as it’s just a little cancer and is kept in check. All you need is a few bad actors and everything goes up in flames.
Careful now, they’re about to classify criticism of capitalism terrorism.
Nono its the best system. All others have failed. You cant have the American dream without capitalism.
/LIES FROM FASCISTS
The culture of consumption is the greatest threat to humanity.
Capitalism, and even communism, are just means to that end.
This is like me taking out a loan to buy a car and then expecting the car to make the payment.
And since all the debt is on the company and not the people/organization who bought the company, they don’t suffer any of the repercussions of defaulting on the loans. Why this isn’t illegal is beyond me.
This is like me taking out a loan to buy a car and then expecting the car to make the payment.
It’s even worse than that. Imagine you bought a car from a dealership and were making monthly payments on it. I take a loan to buy your debt from the car dealership, sell your car to pay my loan off, and then expect you to continue making your monthly car payments to me. You file bankruptcy to get out from under the debt, but by then I’ve pocketed months or years of your car payments and come out with a tidy profit.
And then I do it to hundreds of other people, over and over again, as long as other rich people are willing to loan me money. Which of course they are, because running companies into bankruptcy is incredibly profitable.
Something something road to serfdom.
Well fuck … that’s even more depressing.
It was illegal, then Reagan changed that.
Because of course it was Reagan.
Elementary my dear billwashere, in one word: money.
People don’t notice the leeches, so noone cries out. This enables said private equity leeches to
bribe politiciansmake considerable donations to various political action committees. And believe it or not, politicians like money.Well, you wouldn’t want those politicians to be poor?
Oh deary me, no, poor politicians would be susceptible to bribes
Well, in theory it’s the responsibility of the banks to not make bad loans. If private equity passes on their debt to the company they bought, and then that company goes bankrupt and the private equity walks away free, that’s still the bank’s problem and they’re gonna lose a lot of money. Of course the problem is banks have a pretty bad track record about being disciplined with their loans.
below is a reply to a comment I made below, pasting here as I find it crazy how this went down and is allowed.
For those curious I did a little digging. I’m on mobile so won’t be going in and out to add company names etc.
Basically, the private equity firms got together and said let’s buy Toy R Us for $6.6B but we only want to use say 300M of our own money and get a loan for the rest.
Then they bought Toys R Us but made them sell all assets to equity firms which then leased them back to Toys R Us so they could pay back the loans. This means Toys R Us are paying hundreds of million a year to cover loans and can’t put that money into making a better business.
The private equity firms also made Toys R Us issue dividends in the hundreds of millions so private equity can make money.
In the end private equity walked away with over $1B in profit whilst Toys R Us declared bankruptcy with $5B still left to pay.
What a fucking insane system. Like how many people lost their jobs so these ghouls could make some extra cash off its downfall.
And people think I’m crazy for making my life harder by not shopping at places like Amazon or being a pirate and not giving money to Netflix etc.
I feel I am living in crazy land. Like the Uk has all our pensions and shit tied to the damn stock market, ensuring we can never really leave this system.
Sweet jesus. How is this not some kind of hyper mega ultra fraud?
I have no idea and it seems insane to me.
I was looking for the same thing in my country, UK, thinking we can’t be as bad as America, but nope many of the companies that have died during my life have been due to LBOs. The world is insane and I don’t see how we can change it.
In the UK I learnt that Asda one of our largest supermarkets is in a similar place due to two brothers doing an LBO to buy it. Now it’s saddled with debt meaning it won’t be able to innovate like Tesco or Sainsbury’s and thus will likely just bleed customers. Makes me wonder why these two brothers with more money than God would want to carry on, like I literally can’t comprehend wanting more than you need. Perhaps I have different motivations as I see time as my most precious asset and will earn less money than I could just for the easier life of being able to chill more and do the things I like.
It is insane. You’re not crazy, or at least if you are we can be crazy together because I also think the whole thing is rotten to the core.
It’s pretty disgusting what the borgeousie get up to and away with. The whole world is broken. How we have decided society is going to work and run is all one big collective illusion anyways; we might as well make the mirage nicer for the majority of us humans instead of scrabbling like crabs climbing over one another to get to the top.
Anyways, I think part of the problem is once you see the illusion there isn’t much of anything to do about it as an individual because there’s so much going on out of your control.
I think that’s a big part of why we’re seeing more anxiety and depression than ever - because we know how we live (particularly in the west but really almost everywhere) is not sustainable, destroys the environment and causes suffering on a global scale but we keep dutifully existing quietly in the system as the cogs we are.
I like all the stuff I have, I like my car and house and standard of living but I don’t know if it would be feasible for the whole world to live like me and I’m not even rich or that well off. That’s the real crazy part. I have some privilege, I know I’m at least better off than half of my fellow Americans … But still I am just a proletariat like every other person working for wages.
Because bankers buy politicians and if people complain they buy news coverage to call the naysayers socialists
the primary shareholders of a company can usually do whatever they please (as they should in the case of some proprietorship) as such can sell whatever assets for whatever price.
I’m kind of financially illiterate
what part of the firm’s actions were fraudulent? if they make an offer and toys r us accepts, there’s nothing predatory going on is there?
Many of these are hostile buyouts, which means they use their money to buy a majority of shares in the company and then overthrow the board. I don’t know if the Toys R Us sale was one of those though.
And they’re not saying it is fraudulent. Just that it should be fraudulent.
It’s not hard to use financial trickery to temporarily tank a stock price making it easier to buy up a company. When redditors went after gamestop shortsellers, the shortsellers used tricks to dip the stockprice just low enough just temporarily enough to trigger margin calls and crush the redditors.
It wasn’t fraud but it was poor business decisions based on their hope for massive growth instead of seeing success as steady profitability. They sold off assets (real estate) and then signed up to lease the property back from the new real estate owners. This shifted assets to liabilities. They idea would be to use cash to grow the business. They took too much cash as distributions to investors instead of making sound long term business decisions that would keep ToysRUs operating for the long term.
thank you for the explanation
What I don’t understand about the whole thing is who ends up holding the bag of all that debt?
Like banks that lend them billions must be intelligent enough to know how private equity takeovers like this work. So if they lend them money, they surely would want to get that off their books asap. But who do they sell it to? I can’t imagine there is any type of reinsurance for this, since insurance providers should know even better.
I imagine some of the debt is to employees and small contractors, but can that really account for such a massive sum?
So the Equity Holders (The Private Equity firms) were largely shielded from risk as they had taken out billions in dividends and they had a small equity state relative to the debt meaning their downside was limited.
The creditors (large banks) were left holding the bag, but they’d had years of interest payments so they wrote off the rest and likely still made some profit.
Employees, suppliers, and landlords. Employees lose their jobs, suppliers get pennies on the dollar for what they’re owed and landlords might have got some money but still not all.
So in short it was the banks, but don’t forget they had years of interest payments and after all they took the risk.
Well, I mean, banks kind of ‘invent’ the money which they hand out as loans…so what do they care, really?
When the pile of bad loans gets to big, they sell those bundled as loot boxes to other banks. When that pile starts stinking too much, they are too big to fail and get bailed out. That’s the circle of life 🪇🎶
Welcome to the house of cards that is globalisation and capitalism.
landlords might have got some money but still not all.
This is assuming that the landlords aren’t also the private equity companies as well. So far as I can tell in long term care/assisted living/skilled nursing facilities, the same parent company owns everything, but the food branch is separate from the nursing branch, is separate from the physical rehabilitation branch, is separate from the admin services, and since they are all separate from the building branch, they are all operating “at a loss since” they have employees to pay. All the money goes to the building branches and everyone else gets told to do more with less.
The banks can also technically short the stock as well once the buyout was public, knowing how shit the deal was they can make money on the downside at the expense of all the pensions, 401ks etc that had initially bought the stock. There also isnt a limit that prevents shorting the stock more than shares are in existence. Hence why the gamestop situation was close to breaking the whole stock market a few years back when they started turning everything around for the companies bottom line. With the stock now able to make it think a bout a billion more shares over time the out for the short side has been sort of given without completely nuking the market. But as when the shares are diluted is up to the board it allows gamestop to take advantage of the short side to create more cash on hand for themselves threw timing their market offerings to coincide with when swaps that are housing those shorts come due. In the toys r us case the executives and board were happy to take their golden parachute from the buyout and let ordinary people’s pensions and 401ks carry the bag for them in the form of the stock going to zero and eventually being delisted from the market.
Not sure this applies here as it was a private buyout meaning that there would be no stock to short.
They could have shorted it before the buyout to get a better deal, but the banks didn’t buy it the just lent the money.
Also shorting before could be seen as insider trading, right? Not that something being illegal means it wouldn’t happen, but feels like that would be hard to hide.
So we make interest illegal and the whole scam falls apart, got it.
and if you do that most of the economy fails because no one wants a bond that does nothing
The current economy sucks anyway. Houses as investments, line-go-up disposable consumerism, rent-seeking, it’s all fucked if you aren’t born on top.
seems fine for anyone that already has a house, like everyone should (for hundreds of years)
Sadly the only way is a lot more Luigi’s. If more CEO’s start getting wigged off maybe they’ll lobby for change.
Just sad that most people have it just good enough to not want to risk prison forever to murder someone, although if I could get away with it I’d have no issue in pulling the trigger on these ghouls.
Companies are valued by earnings-per-share, independent of the assets. So if the P/E ratio is too low the company costs less than its assets and it pays off to sell the parts.
https://en.m.wikipedia.org/wiki/Price–earnings_ratio
In this case I heard a rumor that Amazon did it to dominate the toy market, so losses could have been acceptable.
I heard a rumor that Amazon did it to dominate the toy market
I certainly would not put it past them.
Alot of debt gets bundled into bonds or other investment vehicles and sold. So small retail investors, retirement funds, etc end up holding the bag. Sometimes the banks lose, but they can take tax write offs and if the loses are too great, they can often get bailed out by the government.
IIRC it was Mitt Romneys firm that did it to (technically after he left leadership, if i recall)
Impossible! Mitt Romney is one of the good conservatives!
/s because tens of millions of liberals actually believe that it’s true.
He is one of the ones who actually wants a functioning government.
Just saw this after making my comment. I believe it was.
Bain Capital
Not technically, it was years after he left Bain.
And people think I’m crazy for making my life harder by not shopping at places like Amazon or being a pirate and not giving money to Netflix etc.
You’re not crazy; you’re smart.
The average person just doesn’t want to accept how stupid they are.
The hypersane smart get called crazy by conformists.
In a sane world that would be life in prison illegal.
Sadly we live in crazy town.
Wait until you hear about using shorts to drive a company out of business or stock buy backs.
Look up Cellar boxing, you’ll see all the companies that were driven out of business because of this strategy
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Truer now than when Henry Ford said it like a hundred years go.
The SEC exists to shelter Self Regulating Organizations from any threats of democratic governance or law enforcement. Oh ya and to keep up the legalese charade that there literally is no such thing as counterfeit stock (because the Secret Service has purview over counterfeiting for some strange reason)
Fuck the stock market 🖕
The Secret Service has purview over counterfeiting because that’s what it was founded for. More confusing is why they became the presidential protection service from there.
Wasn’t it Bain Capital (Mitt Romney’s old place of work), or am I misremembering?
Yes, that was one of them.
From OP
Basically, the company had to pay for its own buyout when private equity firms KKL, Vornado, and Bain bought the company for $6.6 billion, mostly with loans.
Ah, I skimmed it and must have skipped over that
It’s cool. My intention wasn’t to call you out.
Its best to plan to not have a retirement fund. Plenty of communities just take care of each other instead.
I’m not sure what you mean. We have a state pension tied to the stock market.
I also have a private pension too. I don’t see how not planning for retirement can be beneficial?
The UK state pension is largely a Ponzi scheme, no? Those paying tax now fund those receiving pensions now with some promise that they’ll get returns in the future. The only difference is it’s backed by the currency issuer and they’re pretty up front about it.
I don’t know that I would call it a Ponzi scheme, although I could argue for it based on current trends.
Basically, the everybody pays in to the state pension with the understanding that it pays for retired people. So yes people paying in now are covering those that have retired.
The thing is now though is that birth rates are not keeping up with retirements, understandably as why would you have a child in this shit hole, so that means each year it’s harder and harder to pay for the pensioners.
The above is incredibly funny when you look at this silly anti immigration rhetoric, we need more immigration to sustain old people not less. These fools will be shocked when they ban immigration and retire and the state is like yeah we got nothing.
What’s worse is it isn’t means tested which I would support but many older people don’t as they see it as they paid in expecting it back where I see it as paying in to support those that need it.
So I have two bosses one is amazing and very progressive and has never done wrong by their 6 employees. The other is not so much progressive and is soon to retire. He is selling his house for £500k, has lots in savings already and is taking his state pension because, and I quote “ I paid in so it’s mine”, now I can’t fathom this behaviour as I don’t want more than I need and would happily not take money if I can support myself.
Alas, these are the people that vote so we are fucked.
