April 12, 2018 / 5:34 AM / 3 months ago

Breakingviews - Toys R Us Asia deal will be far from child’s play

HONG KONG (Reuters Breakingviews) - Toys R Us has some growing up to do in Asia. The bankrupt U.S. toy seller has drawn bids of over $1 billion for its Asian unit. The business’s next owner will need to grapple with everything from digital strategy to a shrinking number of kids in Japan.

A Toys R Us store is pictured in tToronto, Ontario, Canada., March 15, 2018. REUTERS/Carlo Allegri

The problem is not that the region’s children are tiring of dolls and action figures. Euromonitor forecasts toy sales in Asia Pacific will grow 6.3 percent annually by revenue over the next three years, almost five times faster than in North America.

But this kind of retail is particularly vulnerable to disruption. Toymakers can cut out the middleman, by selling products directly online, or through platforms run by Alibaba, JD.com and others. That also makes manufacturers increasingly reluctant to make exclusive ranges for retailers. 

Perhaps reflecting this challenge, same-store sales at Toys R Us in Europe and Asia fell 1.6 percent in the fiscal year ending late January 2017, the last full year for which figures are available. One fix is to make shops into exciting destinations that lure in kids and parents, rather than the sterile big boxes that defined Toys R Us in America.

The unit’s geographic focus is also suboptimal. Its Chinese presence has grown fast but Japan, with its ageing and shrinking population, still accounts for a majority of revenue. Net Japanese sales in the last full financial year came in at $1.3 billion, down from $1.8 billion four years earlier.

Hong Kong’s Fung brothers, the billionaires behind trading and logistics specialist Li & Fung, will already be keenly aware of these challenges, as current shareholders. So will other bidders. And a modest purchase price will give the next owner a better chance of financial success. A $1 billion price tag implies a multiple of roughly 10 times historical EBITDA, says a person familiar with the matter – where last year retail deals in Japan averaged nearly 13 times EBITDA, and those in the rest of Asia came in above 17 times, according to Thomson Reuters data. Even so, this will hardly be child’s play.

Breakingviews

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