Harrop: Toys R Us shows how private-equity companies operate

Toys R Us offers a vivid example of how they operate. In their 2005 leveraged buyout, two private-equity firms, Bain Capital and KKR, and Vornado Realty Trust immediately piled on over $3 billion of new debt.

With 97 percent of its operating profits now going to pay interest, the company had little left to fix up the stores. How could it compete with Walmart, much less Amazon? There was no cushion when the Great Recession hit.

Basically, the investors had put the company in handcuffs, seized its life vest and thrown it in the ocean. If Toys R Us survived, the investors would declare themselves geniuses. If it didn’t, they’d walk away after collecting $470 million in interest and “advisory fees.”

The worker advocacy group Rise Up Retail wants that money to go to the laid-off employees. But in the bankruptcy proceeding, they stand in line behind other creditors. “They may end up getting nothing,” according to a Bloomberg report.

Here’s the kicker — or shall we call it “the kick”? The investors now talk about reviving Toys R Us. They’re keeping its brand names and web domains. And they’ve trotted out the Toys R Us mascot, Geoffrey the Giraffe.

“Guess who’s back?” Toys R Us recently tweeted. “He’s been traveling across the globe for the past few months but now #GeoffreysBack and once again ready to set play free for children.”

The brand clearly still has value. If the owners can dump the company’s debt and legacy wages for employees, they could go back into business, worker advocates speculate. New people could be hired at lower wages.

Toxic times

The resurfacing of Geoffrey has enraged laid-off employees. Toys R Us sells touchy feely products, and abused workers picketing its properties might not be good for sales.

Facing noxious publicity, Bain and KKR set up a $20 million “hardship” fund to help the laid-off workers, nowhere near what’s owed them. Vornado didn’t participate.

Meanwhile, Solus Alternative Asset Management, a hedge fund that holds some Toys R Us debt, accused the workers’ rights groups of trying to extort investment companies.

Other countries have significant private-equity investment but more rules of the road. In Germany, for example, most workers are guaranteed severance payments. It seems highly unlikely that the current leadership in Washington will do anything to displease Wall Street.

But some state-run public pension funds that invest in private-equity and hedge funds are asking sharp questions about their role. After all, they represent public employees, many unhappy at how these companies victimize other workers and hurt communities.

It’s understood that in our economic system, companies sometimes fail and workers lose their jobs. But this belief that workers are nobodies, mere pieces the investors can flick off the Monopoly board with no consequences, is a mark of our toxic times. It wasn’t always like that.