“Bain Capital joined with management employees in 2000 to take over KB Toys, …. Two years later, KB executed a so-called recapitalization plan in which it took on $66 million in additional debt while using its free cash to pay $85 million to Bain and $36 million to senior managers who approved the deal. As with Ampad, Pagliuca said he again received a sum proportional to his investment. In January 2004, KB filed for bankruptcy. KB Toys has since gone through a second bankruptcy and complete liquidation.”
“If it didn’t have a penny of debt,” Pagliuca said of KB Toys, “it probably would have gone out of business.”
But here are a few pesky facts that get in the way of that statement: when Pags and Bain bought KB Toys the company, then had annual sales estimated at $1.5 billion and a year-round workforce of 13,000. Bain decisions caused the debt that brought the company to bankruptcy.
The Berkshire Eagle publishes a letter to the editor (2/3/09) from a former KB
employee on how top management made out even in bankruptcy while others
“Ironically when KB filed Chapter 11 in Jan. 2004, some of the execs left the company and returned later with better packages than before. What about the rest of us who stuck behind KB because we believed in this company?… Many of us were let
go immediately and our insurance was discontinued the following day. We all have houses, property taxes and so on to pay as well.”
What Bain Capital and Pagliuca did to KB was so outlandish that they were sued for their actions. The opening line of the lawsuit says it all:
“This action seeks redress against Bain Capital and other defendants for fraudulently transferring $121 million from KB Toys, Inc. and its subsidiaries to themselves and their associates in April 2002, there by causing KB Toys to become insolvent. The $121 million payout and the Defendants’ other misconduct devastated KB Toys, ultimately causing hundreds of its employees to lose their jobs and costing the innocent suppliers of the KB entities hundreds of millions of dollars in unpaid bills.”
The case was settled for $27,000,000.
When Pagliuca was asked about the Ampad incident recently, he said “I’ll fight tooth-and-nail to get the accurate story out there”. Comments here
Lets hear the real story then. This whole story is very reminiscent of a scene in Goodfellas. The mob strong arms businesses into an ownership stake, then quickly suck the company dry until one day they light the place on fire to collect the insurance money. The only people screwed in both instances are the employees who are out of jobs.