Toys R Us Asia deal will be far from child’s play amid problematic market changes

Source:Global Times Published: 2018/4/16 22:13:40

Toys R Us has some growing up to do in Asia. The bankrupt US toy seller has drawn bids of over $1 billion for its Asian unit. The business' next owner will need to grapple with everything from digital strategy to a shrinking number of children in Japan.

The problem is not that the region's children are tiring of dolls and action figures. Euromonitor forecasts toy sales in the Asia-Pacific region 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, 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 aging and shrinking population, still accounts for a majority of revenue.

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 (earnings before interest, taxes, depreciation and amortization), 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.

The author is Alec Macfarlane, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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