FAO Acquisition Rounds Out Right Start

At first glance, it looks like a case of the tail wagging — or buying — the dog. The Right Start, a $65 million children’s products cataloger/retailer, on Nov. 19 agreed to buy $150 million toys cataloger/retailer FAO Schwarz from Amsterdam-based retailer Vendex KBB. The deal, scheduled to close in January, is for a bargain price of $55 million.

This isn’t The Right Start’s first acquisition of an appreciably larger competitor. The Calabasas, CA-based marketer had acquired $335 million retailer Zany Brainy in August. Zany Brainy, which had bought rival toy retailer Noodle Kidoodle in July 2000, filed for Chapter 11 in May 2001.

With its latest acquisition, The Right Start has a presence in a gamut of niches within the children’s market, says president Jerry Welch. The Right Start sells toys and accessories for babies and toddlers; Zany Brainy, which has absorbed the Noodle Kidoodle brand, specializes in toys for children ages 3-12; FAO Schwarz targets kids of all ages and is the most upscale of the three. All three brands have their own retail chains and Websites, and they will each have their own catalogs when The Right Start relaunches the Zany Brainy title this spring. “We think there’s a void in the [catalog] marketplace,” Welch says. “We’ll reevaluate certain matters with FAO coming on board, but we will certainly have a Zany Brainy catalog.”

While The Right Start plans to continue operating all three businesses separately, Welch says that the company will aggressively cross-promote the brands in all stores. He anticipates total company sales of about $650 million in 2002, with each brand bringing in about $30 million of Internet and catalog sales. About 17% of FAO Schwarz’s sales, or $25 million, came from the catalog last year.

Not all fun and games

Although FAO Schwarz is a better-known brand than The Right Start or even Zany Brainy, it has suffered from disappointing financials as of late. FAO posted an operating loss of $8 million for the first half of 2001 and expects to lose $17.6 million for the entire year.

Indeed, Vendex was so eager to sell FAO, it agreed to pay The Right Start more than $10 million to cover restructuring charges and to lend it $18 million for integration costs. Although Vendex will receive a 15% stake in The Right Start, it plans to divest the interest this year. What’s more, in preparation for the sale, Vendex is eliminating one-third of FAO’s 1,500 jobs. Most of the job cuts will come from the closing of 17 of FAO’s 42 U.S. stores.

Bryant Riley, president of Los Angeles-based regional brokerage firm B. Riley & Co., cautions that The Right Start is buying a company that has had a hard time in a “pretty depressed market.” On the bright side, though, he adds that FAO’s new parent should be able to grow the Right Start and Zany Brainy catalogs by way of FAO’s more extensive customer database.

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