M&A

Fun in Playland: Toys “R” Us Sued

Iron workers look to block deal, claiming the 3 percent premium isn't premium enough.
Stephen TaubMarch 30, 2005

A pension fund is reportedly trying to block the planned sale of Toys “R” Us, Inc. to an investor group. The reason for the opposition? The fund’s managers say the offer for Toys “R” Us is too low.

In a suit filed March 25 in Delaware Chancery Court, the Iron Workers of Western Pennsylvania Pension and Profit Plans claim the $6.6 billion purchase price is “grossly inadequate.” Hence, the union wants the judge to block the planned acquisition of the retailer by Kohlberg Kravis Roberts & Co., Bain Capital LLC, and Vornado Realty Trust.

The suit asserts that that the deal vastly undervalues Toys “R” Us—the second largest seller of toys in the U.S.—because the company owns, rather than leases, 36 percent of its real estate (Toys “R” Us operates 681 stores in the United States, 601 in other countries, and 218 Babies “R” Us stores). According to a report in Bloomberg, the lawsuit states that Toys “R” Us is “sitting on a largely undeclared real estate portfolio of properties held on its books at historic values.” In addition, the pension plan claims Toys “R” Us management is selling the corporation’s “crown jewel,” its successful Babies “R” Us unit.

Further, the Iron Workers claim that directors at the toy retailer violated their fiduciary duties to shareholders by agreeing to pay the buyout group a $247 million termination fee if company management kills the deal, according to the wire service report.

On March 18, Toys “R” Us announced the company was being sold to KKR, Bain, and Vornado. At the time of the announcement, the deal price ($26.75 per share) worked out to about a 3 percent premium for shareholders. The offer ended a seven-month auction for the besieged toy retailer, which has lost considerable ground in recent years to rival retailer Wal-Mart.

KKR and Bain are also part of a seven-firm consortium that earlier this week agreed to buy financial services software specialist SunGard Data Systems, Inc. That acquisition is valued at $11.3 billion.