Toys R Us as an example of private equity risk

Back in March 2005, a group of marquee private equity firms -- Kohlberg Kravis Roberts & Co. and Bain Capital -- purchased Toys "R'' Us for $6.6 billion. It was certainly a leap-of-faith. After all, the toy retailer had been under assault from Net upstarts as well as mega retailers like Wal-Mart Stores, Inc. (NYSE:WMT).

Well, the environment got even tougher since then. As a result, Toys "R" Us hired Gerald Storch, a top-flight executive from Target Corp. (NYSE:TGT), to run the ailing toy retailer (he came on board in February).

And, he seems to be getting some traction. In fact, according to a piece in Bloomberg.com, the bonds of Toys "R" Us have been rallying lately. Keep in mind that during the summer, bond investors were pricing the bonds as if they would default.

What has Storch done? Well, he has cut 3,000 jobs, closed down a variety of stores and renovated other stores. Perhaps his best move was offering exclusive products, such as the Nitro Notebook computer.

But, the fact remains that the company has $6.72 billion in debt and the competition is not getting any easier.

However, this is high profile deal and it would be an embarrassment if things went awry. In other words, this appears to be an early test of the riskiness of the private equity world.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates DealProfiles.com.