SO YOU HAVE HEARD THAT TOYS
"R" US HAVE GONE BANKRUPT.
THEY'RE GOING TO CLOSE ALL THEIR
STORES IN THE U.S. AND YOU MIGHT HAVE HEARD DIFFERENT REASONS FOR
THAT BUT
YOU PROBABLY DIDN'T HEAR THE MOST IMPORTANT ONE SO THAT'S WHAT I
WANTED TO SHARE WITH YOU TODAY.
CNN EXPLAINS:
IS IT MARKET REASONS?
YOU'VE GOT AMAZON CAUSING TROUBLES OBVIOUSLY FOR THE RETAIL INDUSTRY,
YOU'VE GOT OTHER COMPETITORS.
LET'S FIND OUT.
THEY WERE HAVING PROBLEMS BEFORE
AMAZON BECAME THE GOLIATH THEY ARE
NOW.
IT'S ABOUT TO GET WORSE FOR THEM.
WAS
IT THE DEBT, OR WAS IT OTHER
ISSUES AND BY THE WAY, THEIR
DEAL WITH THE KUSHNER FAMILY IS IN REGARD TO BUILDINGS IN NEW YORK
CITY, NOT RELATED TO TOYS "R" US TO BE CLEAR.
WHAT WAS THE BIGGEST PROBLEM?
CHRIS ISADORE WRITING FOR CNN EXPLAINS:
THIS IS
ACTUALLY SOMETHING THAT HAPPENS ALL THE TIME.
WHEN
COMPANIES ARE BOUGHT BY PRIVATE EQUITY GUYS LIKE BANE CAPITAL, A LOT
OF TIMES THE PRIVATE EQUITY GUYS TAKE OUT A SIGNIFICANT CHUNK OF
MONEY FOR THEMSELVES OUT OF THE COMPANY RIGHT IN THE BEGINNING.
THEY SADDLE THE COMPANY WITH DEBT THAT SO THE COMPANY CAN NEVER
IMPROVE ITSELF.
LET'S GIVE YOU THE SCOPE
OF IT.
EXACTLY AS WAS PREDICTED, AND THIS IS WHAT HAPPENS WHEN THESE COMPANIES
ARE LOADED WITH DEBT.
THERE'S A LOT OF
DIFFERENT REASONS WHY A COMPANY MAY HAVE DEBT, THAT IS
NOT YOU LEGITIMATE.
NOT ALL OF KKR AND BAIN'S INVESTMENTS GO SOUTH LIKE
THIS AND THEY DO NOT WANT IT TO GO SOUTH, THEY WANT TO BE ABLE TO TAKE
MONEY OUT ON THE BACK AND THE FRONT END.
ON THE OTHER HAND, WHEN THEY
ARE OVERLEVERAGED LIKE THIS AND A COMPANY HAS TO SPEND $400 MILLION A
YEAR JUST ON SERVICING THEIR DEBT, IT IS VERY HARD TO RECOVER.
IT IS
VERY HARD TO PUT IN THE NECESSARY INVESTMENTS IN THE ACTUAL BUSINESS
ITSELF TO GROW THE BUSINESS, TO UPKEEP THE BUSINESS, AND TO HAVE IT
BE PROFITABLE.
SO BASICALLY, YOU CAN CALL IT A VAMPIRE SQUID IF IT IS
OVERLEVERAGED, AS THEY COME IN AND THEY START SUCKING THE MONEY OUT AND
THEN WHEN IT COLLAPSES THEY GO AMAZON, WALMART.
THOSE ARE FACTORS,
BUT THEY WERE NOT THE MAIN FACTOR.
IN FACT:
BLOOMBERG REPORTS:
DON'T CRY FOR THOSE PRIVATE EQUITY COMPANIES BECAUSE THEY HAD ALREADY
TAKEN OUT NEARLY HALF $1 BILLION FROM TOYS "R" US BEFORE IT COLLAPSED
SO UNDERSTAND WHEN YOUR LOCAL STORES GO DOWN, THERE IS SOMETIMES AN
OBVIOUS REASON THAT YOU CAN SEE WITH YOUR OWN EYES, COMPETITORS DID
BETTER.
SOMETIMES THERE ARE REASONS YOU CANNOT SEE AND THAT HAS TO DO
WITH
HOW PRIVATE EQUITY IS STRUCTURED AND HOW MUCH DEBT THEY PUT ON THESE
COMPANIES AND AT THE END OF THE DAY, AND MOST OF THE DEALS, THE PRIVATE
EQUITY GUYS GET MONEY IN THE FRONT.
OFTENTIMES IN THE BACK, THEY MAKE
PLENTY OF MONEY AND THAT IS THEIR JOB BUT SOME OF THESE COMPANIES
COLLAPSE IN THE MEANWHILE AND WE NEVER HEAR OF THEM AGAIN.
AND THAT
IS HOW THIS GAME IS PLAYED.