Fairfax eyeing some U.S. stores after Toys “R” Us Canada purchase

TORONTO — Fairfax Financial Holdings Ltd.’s president Paul Rivett says its plans for Toys “R” Us are not limited to Canada, as it is exploring options to keep a foothold in the U.S. and elsewhere.

The Toronto-based company, whose $300-million stalking horse offer for the Canadian subsidiary of the toy retailer was approved in a U.S. court this week, is looking for stores outside of Canada it can potentially snap up.

“There’s pieces now we can invest in, pods of stores in the U.S., or elsewhere, and utilize the fact that they’ve got all the systems in Canada,” Rivett said in an interview Thursday after Fairfax’s annual general meeting of shareholders.

A Virginia court approved the sale of Toys “R” Us Canada to Fairfax on Tuesday, ending the uncertainty looming the Canadian subsidiary after it filed for creditor protection in September, and the retailer’s U.S. division sought bankruptcy protection.

The sale is scheduled to go before Ontario Superior Court on Friday.

Fairfax had made a $300-million stalking horse offer last week, triggering an auction for Toys “R” Us’ 82 Canadian stores. Fairfax emerged as the only bidder.

The Toronto-based company’s bid surpassed the $215-million bid made earlier this month, outside of the auction, by California-based, privately held toy company MGA Entertainment Inc.

Fairfax, which is involved in property and casualty insurance and reinsurance and investment, had been keeping a close eye on Toys “R” Us Canada but it was a call from another toy-industry figure that prompted a closer look, Rivett said.

Vic Bertrand Jr., of the family who founded toy maker Mega Brands best known for its building blocks, called Fairfax, according to Rivett. Fairfax had been a key investor in the Mega Blox maker until it was sold to American industry giant Mattel in 2014.

“They said, ‘Listen, these folks at Toys “R” Us are saying there’s really a good viable business in Canada. Don’t let it die’… As a result of them calling us, we took another look,” Rivett said.

The rationale to purchase included the Canadian subsidiary’s $100-million in earnings before interest, taxes, depreciation and amortization, but the value of the stores themselves as well.

Conservatively, the real estate portfolio is valued at $220 million but could be worth as much as the $300 million price-tag, Rivett added.

Fairfax has brought in a third-party to assess the Canadian subsidiary’s stores, and several located in high-density areas have “significant value that might not have been properly appreciated.”

“We have no current intention to do anything with the stores … (but) we’re value investors,” he said. ”So when we buy something, we want to have the downside protection.”

The Canadian stores will remain open, and the profits will remain in Canada and reinvested in the business instead of being extracted out by its U.S. parent in order to pay debtholders.

“We’re going to let them keep their cash and reinvest in the business, and do better from an economic perspective,” Rivett said. ”Change the store formats so it’s more inviting for families and kids, and move away from the big box that hasn’t changed over the last 20 years or so.”

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