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Tuesday, October 02 2018 02:00

Toys 'R' Us IP Auction Cancelled: Will the Toy Industry Support a Revived TRU Run by Lenders who Liquidated the Original Company?

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UPDATED BELOW with Statement from the Company...

As I've said before, the saga of the Toys "R" Us collapse just continues to get stranger as time goes on, with new layers of unusual and in some cases, unheard-of activity still being revealed. Following the announcement that Bain Captial and Kohlberg Kravis Roberts (KKR) were setting up a $20M fund to provide some severance to a portion of the 33,000 workers that were left jobless following the closure of the toy retailer in the U.S., now comes word that plans are in motion for a revived Toys "R" Us that could be run by some of the very companies that drove the company into liquidation in the first place. One theory that's been floated in back channels and among former TRU employees and business partners in recent months has been that the long-awaited IP auction has been intentionally delayed, having been postponed from June to August and then again to October. Now that auction has been flat-out cancelled, and the reason may come as a surprise (or not) to many: some of the same lenders that forced the company into liquidation have been plotting to revive both Toys "R" Us and Babies "R" Us under a new retail entity.

In court documents filed yesterday by Kirkland & Ellis LLP and Kutak Rock LLP (co-counsel to the debtors and debtors-in-possession), the court authorized the debtors to cancel the intellectual property auction. Here's two choice excerpts of importance:

"...the Debtors have determined, in consultation with the Consultation Parties, to cancel the Intellectual Property Auction and reorganize Debtor Geoffrey pursuant to the Second Amended Chapter 11 Plans of Toys Delaware Debtors and Geoffrey Debtors [Docket No. 4542] (the “Plan”), which Plan, among other things, contemplates a new, operating Toys “R” Us and Babies “R” Us branding company that maintains existing global license agreements and can invest in and create new, domestic, retail operating businesses under the Toys “R” Us and Babies “R” Us names, as well as expand its international presence and further develop its private brands business."

"...the Selling Debtors, in consultation with the Consultation Parties, have determined that the Qualified Bids were not reasonably likely to yield a superior alternative to the Plan, including with respect to: (i) the probable economic recovery to creditors of the Selling Debtors’ estates; and (ii) the benefits to other direct and indirect stakeholders of maintaining the Toys “R” Us and Babies “R” Us brands under a newly-established, independent U.S. business, including, without limitation, expected expansion of employment opportunities for workers and merchandising opportunities for toy and other vendors."

This filing arrived less than 24 hours before toy manufacturers and retail buyers were set to meet at The Toy Association's annual Fall Toy Preview in Dallas - a look ahead to what new products could be coming down the line. 

If this all pans-out as written, that would mean that lenders who controlled a relatively small amount of Toys "R" Us' overall debt and in-turn held an unfortunately large amount of say in pushing for total liquidation (sorta "last in, first out") would now own a fresh version of Toys "R" Us and Babies "R" Us without all the baggage of the past. Think of it as a "hard reset." This would be players like Solus Alternative Asset Management and Angelo Gordon & Co. LP, which also would explain why they've been "clashing" with overseas partners in regard to the TRU Asian business these past few months. Under this week's filing, their new "branding company" would take care of maintaining those global license agreements, while the "newly-established, independent U.S. business" would be brand-new retail stores.

While there would be some question as to whether or not customers would support Toys "R" Us/Babies "R" Us 2.0 after other retailers have spent months trying to capture their business, the bigger question is whether or not the toy industry would support it? The vendors (who former TRU Chairman and CEO Dave Brandon famously blamed in part for his company's woes) were used and abused - left hanging unpaid for millions of dollars in goods that were ordered, shipped and delivered to Toys "R" Us and subsequently liquidated. Thousands of underpaid employees saw entire careers and bank accounts wiped out as they faced-off against sometimes adversarial deal-seekers in the final days. Some toymakers (such as Mattel) have been forced to layoff thousands of employees, while others have shuttered completely (like Toy State) or have had to merge or be set-up for acquisition (Playhut). In the meantime, the ripples caused by the collapse have hit the supply chain and many connected industries. Even I personally took a hit due to cancelled contract gigs that were in some way tied to products to be sold at  Toys "R" Us. There's a lot of hurt out there, and this entire debacle needs to be a major call to arms. Yes, there's a lot of numbers and money at stake, but at its core, this story is about a lot of people who have been wronged. Done right, there is a real opportunity to create some great new concepts for both Toys "R" Us and Babies "R" Us - concepts that could bring joy to families for decades to come. Doing it right also means properly compensating the entire team from store-level on up, with living wages and real benefits for all - something lacking in much of retail today. I don't want to hear about some "great new toy store" only to find out that it's being built on the backs of $10-an-hour associates at store level. But even if all of that can happen, knowing that behind the curtain lurks some of the same Wall St. figures who contributed to the initial collapse... that's gonna be a huge hurdle to overcome.

UPDATED: 10/2/2018 with a statement from the company:

Geoffrey, LLC's Assets to Be Acquired by Its Secured Lenders

"Geoffrey, LLC, Toys "R" Us, Inc.'s intellectual property holding company subsidiary, announced today that it is moving forward with a plan for substantially all of its assets to be acquired by a group of investors led by Geoffrey, LLC's existing secured lenders.

The announcement was made following a five month marketing effort by Boston-based Consensus, an investment bank retained to market the assets of Geoffrey, LLC, that resulted in several formal and informal proposals to acquire the intellectual property assets. After considering such proposals, it was determined that the proposal from the existing term lenders was meaningfully higher and better than any other global bid or the sum of the bids received on individual assets. The transition of the business to its new owners is pending approval of the United States Bankruptcy Court and all major creditor constituencies are supportive. Geoffrey, LLC thanks all parties that participated in discussions with the company over the prior months, particularly those that submitted proposals, for their thoughtful and diligent engagement.

Geoffrey, LLC, as reorganized, will control a portfolio of intellectual property that includes trademarks, ecommerce assets and data associated with the Toys "R" Us and Babies "R" Us businesses in the United States and all over the world, including a portfolio of over 20 well-known toy and baby brands such as Imaginarium, Koala Baby, Fastlane and Journey Girls. The reorganized company will own rights to the Toys "R" Us and Babies "R" Us brands in all markets globally, with the exception of Canada. It will also become the licensor of the brands to the company's existing network of franchisees operating in countries across Asia, Europe and the Middle East, and in South Africa.

In addition to continuing to service these markets, the new owners are actively working with potential partners to develop ideas for new Toys "R" Us and Babies "R" Us stores in the United States and abroad that could bring back these iconic brands in a new and re-imagined way. Geoffrey LLC will provide additional detail on this front as it becomes available."

Part 2: What is Geoffrey's Toy Box, and is it the rebirth of Toys "R" Us?

Pictured Top: I took that photo in front of the former Gurnee, Illinois Toys "R" Us/Babies "R" Us combo store on September 6, 2018. Three months after closure, it looked from the outside as if everyone had just up and left for the day. Signage still in place, cart corrals in the parking lot, garbage cans overflowing at the entrances. Unlike many stores that had been stripped bare, through the front windows you could see that much of the fixturing was still left in place. 

James Zahn

James Zahn is not a journalist, nor a blogger, though he may be credited as such by others, or even accept the title... depending on the circumstance.  Instead, he considers himself largely to be an "entertainment and lifestyle writer," bringing 25+ years of experience in the entertainment and publishing industries into the family realm as THE ROCK FATHER™.

As a media personality, commentator, adventurer and raconteur, James now finds himself raising a pair young girls - The Rock Daughters™ - along with his wife from their Illinois home.

He is a member of The Toy Insider Parent Advisory Board, has contributed to The Toy Book and writes a regular Star Wars column - Transmissions from a Galaxy Far, Far Away for The Pop Insider. He also regularly serves as a Brand Ambassador and spokesperson for several Globally-recognized pop culture and lifestyle brands in addition to consulting for a number of toy manufacturers. 

Creatively, James has directed/edited music videos, lyric videos, and album trailers for bands such as FEAR FACTORY, has appeared as an actor in feature films and commercials, written comic books, and performed in bands. He currently serves as an artist manager and video director for PRODUCT OF HATE, whose debut album was released by Napalm Records in 2016, distributed by ADA/Warner Music in the U.S. with Universal Music handling global.

James and/or his work have been featured in/on CNN, FOX Business, NBC, ABC, WGN, G4, The Chicago Tribune, BusinessWire, Babble, Fangoria, Starlog and more. He's appeared as a music expert on CNN's AC360 alongside Anderson Cooper, and has been interviewed by Larry King. In the past he served as a writer for the Netflix Stream Team,  Fandango Family and PBS KIDS, penned articles for Sprout and PopSugar, and was a contributor to Chicago Parent.

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