FAO Schwarz Finds a Buyer

Bankrupt toys marketer FAO on Dec. 26 signed an agreement to sell most of its remaining assets to VGACS Acquisition, a subsidiary of DE Shaw Laminar Portfolios, for $20 million. The sale is subject to approval of the supervising bankruptcy court. King of Prussia, PA-based FAO is already liquidating its Zany Brainy retail chain, and on Dec. 24 it agreed to sell its 34 Right Start stores to private equity firm Hancock Park Associates.

The FAO Schwarz deal includes the catalog/retail business, the fabled Fifth Avenue store in New York, and its Las Vegas store. FAO, however, has to sell the remaining inventory in the two stores. FAO has to ask the court to approve the deal or accept a better bid by Jan. 22.

VGACS plans to close the New York and Las Vegas stores temporarily and reopen them in the middle of 2004. It hasn’t discussed plans for the FAO Schwarz catalog.

But Ken Hakuta, a Washington-based entrepreneur who had considered buying the company in partnership with Calyx & Corolla founder Ruth Owades, doesn’t expect the new owners to shut down the direct division. “I understand that they were profitable,” he says, “so I am quite sure they will keep the catalog and online operations.”

Hakuta and Owades decided not to pursue the company after learning that the bankruptcy court will most likely not allow the buyer to lease the New York store at the fixed lease rate of around $90 per square foot. Although the company has 13 more years left on the lease, the court is expected to require the buyer to pay the prevailing market rate of around $180 per square foot for the space in order to provide the greatest possible compensation to FAO’s creditors.

“We knew we could not afford the $180 per square foot. We would end up right in bankruptcy again. No toy retail store could afford it,” Hakuta says.