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In re Toys "R" US6/22/2005
Date Submitted: June 17, 2005
Date Corrected: June 24, 2005
I. Introduction
This opinion addresses a motion to enjoin a vote of the stockholders of Toys "R" Us, Inc. (the "Company") tomorrow to consider approving a merger with an acquisition vehicle formed by a group led by Kohlberg Kravis Roberts & Co. ("the KKR Group"). If the merger is approved, the Toys "R" Us stockholders will receive $26.75 per share for their shares. The proposed merger resulted from a lengthy, publicly-announced search for strategic alternatives that began in January 2004, when the Company's shares were trading for only $12.00 per share. The $26.75 per share merger consideration constitutes a 123% premium over that price.
During the strategic process, the Toys "R" Us board of directors, nine of whose ten members are independent, had frequent meetings to explore the Company's strategic options. The board, with the support of its one inside member, the company's CEO, reviewed those options with an open mind, and with the advice of expert advisors.
Eventually, the board settled on the sale of the Company's most valuable asset, its toy retailing business, and the retention of the Company's baby products retailing business, as its preferred option. It did so after considering a wide array of options, including a sale of the whole Company.
The Company sought bids from a large number of the most logical buyers for the toy business, and it eventually elicited attractive expressions of interest from four competing bidders who emerged from the market canvass. When due diligence was completed, the board put the bidders through two rounds of supposedly "final bids" for the toys business. In the midst of this process, one of the bidders expressed a serious interest in buying the whole company for a price of $23.25 per share, and then $24.00. The board decided to stick by its original option until that bidder made an offer to pay $25.25 per share and signaled it might bid even a dollar more.
When that happened, the board was presented with a bid that was attractive compared with its chosen strategy in light of the valuation evidence that its financial advisors had presented, and in light of the failure of any strategic or financial buyer to make any serious expression of interest in buying the whole Company - even a non-binding one conditioned on full due diligence or a friendly merger - despite the board's openly expressed examination of its strategic alternatives. Recognizing that the attractive bids it had received for the toys business could be lost if it extended the process much longer, the "Executive Committee" of the board, acting in conformity with direction given to it by the whole board, approved the solicitation of bids for the entire Company from the final bidders for the toys business, after a short period of due diligence.
When those whole Company bids came in, the winning bid of $26.75 per share from the KKR Group topped the next most favorable bid by $1.50 per share. The bidder that offered $25.25 per share did not increase its bid. After a thorough examination of its alternatives and a final reexamination of the value of the Company, the board decided that the best way to maximize stockholder value was to accept the $26.75 bid. That was a reasonable decision given the wealth of evidence that the board possessed regarding the Company's value and the improbability of another bidder emerging.
In its proposed merger agreement containing the $26.75 offer, the KKR Group asked for a termination fee of 4% of the implied equity value of the transaction to be paid if the Company terminated to accept another deal,
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