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October 1, 2018 – In a development first reported by the Wall Street Journal, two of the private equity owners of Toys “R” Us Inc. are considering a $20 million fund from which thousands of former employees of the bankrupt retailer would receive some form of severance payment. According to a person close to ongoing negotiations relating to the proposed fund, Bain Capital and KKR & Co., but not Vornado Realty Trust, have agreed to contribute to the fund which is being created outside of the bankruptcy process and which would be comprised of contributions by general at those buyout firms. All three of the firms, which collectively took Toys “R” Us private in 2005 in a $6.6 billion deal that included $5.3 billion in debt, have declined to comment on the fund or its size.
Although this sort of fund is viewed as unprecedented, it is not entirely unexpected. Pressure has been building on the bankrupt retailer’s private equity owners, and in turn investors in those firms’ funds, for months over the treatment of Toys “R” Us 33,000 former employees and this move will be viewed by many as more of a reactive step to ease that pressure than as indicative of a newly found altruism on the part of private equity.
The plight of Toys “R” Us’ former employees has been increasingly championed by politicians and workers’ rights advocates in a climate where private equity, viewed as in part responsible for numerous recent retail sector bankruptcies, is increasingly seen as a villain. According to worker advocacy group Rise Up Retail, former Toys “R” Us employees were promised $75 million in severance pay prior to the retailer’s bankruptcy, the equivalent of two weeks of severance for their first year of service, and one week of pay for every two years on the job after that.
“This win at Toys ‘R’ Us is part of a bigger movement of workers and families fighting back to hold Wall Street accountable for the investments that they make,” said Carrie Gleason, campaign manager for Rise Up Retail. “Bain and KKR made an investment that resulted in a lot of harm for families and communities, and the responsible thing to do is step up and pay workers what they are owed.” Ms Gleason further noted that her group was pushing for state and federal legislation that would require bankrupt companies to make severance payments and for legislation that would restrict private equity firms from loading acquired companies with debt.
These efforts have not gone un-noticed on Capitol Hill. In a letter, dated July 5, 2018, written to the heads of Bain, KKR and Vornado, 19 Representatives and Senator Bernie Sanders made it clear that they were watching the Toys “R” Us case very carefully. The letter reads in part, “Leveraged buyouts-such as those facilitated by your companies-often result in mass job loss, closure of profitable businesses, and unnecessary financial burdens for local government. Such buyouts harm communities, while investment managers walk away with significant gains. In fact, due to the closure of Toys ‘R Us, 33,000 workers lost their jobs, while your firms have extracted over $500 million from Toys ‘ R Us during the period you have owned the company.”
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