According to insider sources familiar with the situation, the initial public offering (IPO) of Toys ‘R’ Us – a leading global retailer of dedicated toys and baby products, is not likely to take place before the first half of 2012 at the earliest. Toys ‘R’ Us had earlier planned to file for an IPO to the tune of about $800 million in May 2010, but is yet to finalize its timing even after a span of approximately 15 months.
The New Jersey-based toy retailer that operates stores under its namesake brand, the Babies 'R' Us and FAO Schwarz labels, has reportedly captured more market share from its rivals in 2010 than it has in the last 20 years of its operations. The business of Toys ‘R’ Us is highly seasonal with fourth quarter accounting for over 80% of the fiscal net income, primarily due to strong holiday sales.
In December 2010, Toys ‘R’ Us reported a 5.4% growth in total sales in the U.S. with an exclusive range of toys and an increased number of temporary stores that lured holiday shoppers away from No. 1 toy retailer Wal-Mart Stores Inc. (WMT). Consequently, the company was bullish about its IPO offer in late 2010.
However, the scenario has changed drastically at present with the stock market giving negative feelers for new share offerings, except some blue-chip technology companies. With fears of a double-dip recession looming large, the strategic decision to defer the IPO is the latest ploy by the string of private equity firms that owns Toys ‘R’ Us to buy more time to enable the company to get a higher price from the secondary offering at a subsequent date. This in turn would enable the owners to capitalize on their investments by selling their holdings at a higher price.
In 2005, Toys ‘R’ Us was acquired by Kohlbert Kravis Roberts & Co. (KKR), Bain Capital and Vornado Realty Trust (VNO) for $6.6 billion. New York-based Vornado Realty is one of the largest real estate investment trusts (REIT) in the U.S., engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us. Vornado Realty currently owns about 32.7% of Toys ‘R’ Us.
Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S.– New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity.
We maintain our long-term ‘Neutral’ rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.
KKR & CO LP (KKR): Free Stock Analysis Report
VORNADO RLTY TR (VNO): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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