Permira, the European buyout group, has joined forces with U.S. rival Apollo to bid for the global operations of Toys “R” Us, the 1990s retail success story that has an estimated $3.5 billion price tag.
The team faces competition from Kohlberg Kravis Roberts, Cerberus and Bain Capital, as well as U.S. property groups keen to engineer a K-Mart style restructuring by breaking up the extensive property portfolio.
The U.S.-listed business said in August it was considering selling Toys “R” Us, the world's largest specialty toy chain, although its faster-growing Babies “R” Us division was not on the block.
Toys “R” Us has more than 1,200 stores worldwide. These include about 680 in the U.S. and and more than 500 operated, licensed or franchised in 29 other countries.
The group has a market value of $4.3 billion, $8 billion lower than its peak 10 years ago.
CSFB, the investment bank, is conducting an auction and has taken about six suitors through to a second round, with bids due after the crucial Christmas trading period.
One person close to the situation said: "The US side is a bit of a basket case. We were interested in the European operations but they were not willing to sell that bit off by itself."
Another said: "The field has narrowed to half a dozen. There is likely to be some collaboration with the real estate guys. It's a big deal [to finance]."
Permira has decided to go for a global solution and has teamed up with Apollo to help solve the U.S. problem.
It is rare for a European private equity group to compete for a U.S. deal.
However, Permira this year teamed up with Apollo and two other buyout groups to buy Intelsat, the Bermuda-based satellite operator, for $5 billion.
Both Toys “R” Us and FAO Schwarz, its rival retailer, were squeezed heavily last Christmas by aggressive discounting of toys by superstore retailers, particularly Wal-Mart.
Toys “R” Us last month reported a third-quarter loss down from $46 million to $25 million.
However, the loss was struck after a $23 million gain from the sale of Kids “R” Us stores, offset by $12 million of associated charges.
Toys “R” Us revolutionized the industry with its big-box, low-price strategy.
It has already said it wants to operate its two divisions as separate entities next year.
John Eyler, chairman and chief executive, said in August that although a sale of the Toys “R” Us part of the group was "a possibility", the focus was on "running our company and taking advantage of our place in the market as the world's largest specialty toy retailer".
The group has about 200 Babies “R” Us stores and also sells through Internet sites.