Toys ‘R’Us files for Chapter 11 as heavy debt and online shopping switch take their toll

BY Fraser Tennant

As a result of a heavy debt load and a consumer switch toward online shopping, toy retailer giant Toys ‘R’Us has voluntarily filed for Chapter 11 bankruptcy protection in the US and Canada.

In addition to the filing in the US Bankruptcy Court for the Eastern District of Virginia in Richmond, VA, the company’s Canadian subsidiary intends to seek protection in parallel proceedings under the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice.

Toys ‘R’ Us intends to use the court-supervised proceedings to restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth.

The company’s operations outside the US and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and Companies’ Creditors Arrangement Act (CCAA) proceedings.

The vast majority of the approximately 1600 Toys ‘R’Us and Babies ‘R’Us stores around the world – which are mostly profitable – continue to operate as usual.

“Today marks the dawn of a new era at Toys ‘R’Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” said Dave Brandon, chairman and chief executive of Toys ‘R’ Us. “Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5bn of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide.”

Furthermore, the company has received a commitment for over $3bn in debtor-in-possession (DIP) financing from various lenders, including a JPMorgan-led bank syndicate and certain existing lenders, which, subject to court approval, is expected to immediately improve the financial health of Toys ‘R’ Us and support its ongoing operations during the court-supervised process.

Serving as principal legal counsel to Toys ‘R’ Us is Kirkland & Ellis LLP, while Alvarez & Marsal is serving as restructuring adviser and Lazard is serving as financial adviser.

Mr Brandon concluded: “We are confident that these are the right steps to ensure that the iconic Toys’R’Us and Babies ‘R’Us brands live on for many generations.”

News: Toys 'R' Us files for bankruptcy protection in US

InsurTech investment increases in Q2 2017 as reinsurers wise up to opportunities

BY Fraser Tennant

Global investment in InsurTech rose sharply in Q2 2017 as reinsurers become more open to its potential for transformation rather than disruption, according to a report out this week.

In ‘InsurTech – the new normal for (re)insurance’, PwC notes that investment in InsurTech by global insurers, reinsurers and venture capital firms surged by 247 percent to $985m, compared to Q2 2016 ($398m). The first three months of 2017 saw $283m of InsurTech funding.

Furthermore, the report predicts the rate of funding and investment will continue at a similar level and highlights an uptick in interest in InsurTech from the reinsurance industry as sentiment turns from fear to bullishness, and from scepticism to collaboration.

“A change has happened in insurance and it is hugely encouraging to see both insurers and reinsurers increasingly view InsurTech as an enabler rather than a competitor,” said Patrick Maeder, EMEA insurance consulting leader at PwC. “This uptick in enthusiasm is vital to ensure the industry engages with innovators to help shape its own success. Neither party can survive this wave of disruption on its own and collaboration between experienced industry players and new ideas and technology will result in new products, reduced costs and more engaged customers.”

Although 82 percent of reinsurance companies say they plan to partner with InsurTechs, including a new wave of start-ups, to explore how new technologies and talent groups can help them play a leading role in transforming their industry, concern about disruption and loss of market share remains. “InsurTech innovators have rapidly established themselves as the backbone of innovation in this industry but reinsurers should not be overly concerned about startups directly disrupting their product offerings,” continues Mr Maeder. “They should instead focus on what makes their business unique and where they see future growth coming from.”

The report also notes that startups are focused less on disrupting the entire industry and more on redesigning specific areas of the value chain, which provides reinsurers with an opportunity to foster a culture of collaboration, embrace the innovative potential within their businesses and ultimately modernise the industry.

Mr Maeder concluded: “Reinsurers then need to find the best way of directly working with this new wealth of tech-savvy talent to place themselves at the heart of what will undoubtedly be a transformation for their business and the wider industry.”

Report: ‘InsurTech – the new normal for (re)insurance’

M&A rebound predicted

BY Richard Summerfield

For a number of reasons, the first half of 2017 saw fairly constrained levels of M&A activity, according to a new report from Clifford Chance. However, despite this relative paucity, a flurry of M&A activity in the final half of the year could be on the way.

The report, 'A Global Shift: September 2017', cites a 42 percent drop in outbound Chinese dealmaking, increased antitrust deal scrutiny and a ‘wait and see’ approach being adopted by many multinationals in the face of heightening global geopolitical chaos as the largest roadblocks holding up progress in H1 2017.

Chinese restrictions on capital outflows, designed to limit “irrational” acquisitions overseas in certain industries including real estate, hotels, movie studios, entertainment and sports clubs, were announced in August as the government published outbound investment guidelines. These guidelines have had a butterfly effect in overseas markets where sellers have become increasingly wary of Chinese bidders and their ability to close transactions. As a result, there has been a sharp decrease in Chinese outbound activity.

Heightened antitrust concerns in certain key markets have been equally damaging. With competition authorities in Europe and Asia toughening their stance on dealmaking, particularly when there is a large data element to deals. There has been a focus on procedural infringements throughout 2017 with authorities increasingly willing to levy significant fines.

“Globally, we are seeing increasing proliferation of inconsistent merger control procedures and greater scrutiny of foreign takeovers on non-competition grounds. Navigating these complexities requires careful planning, understanding of local sensitivities and early identification of remedies,” said Nelson Jung, an antitrust partner at Clifford Chance.

However, there are reasons to be cheerful. An overabundance of dry powder in the private equity industry is driving activity as investors look to capitalise on the upheaval caused by global geopolitical uncertainty.

There are also a number of surging industries. The consumer, retail and leisure sector has seen considerable activity, with larger deals driving a 9 percent rise in the industry's share of dealmaking compared to 2016. The real estate and healthcare industries also recorded a notable uptick.

US M&A in the first half of the year is more or less flat from H1 2016; however, M&A activity in Europe has been healthy, with an 8 percent increase compared to H2 2016. Europe has benefited from investment from the US, as well as intra-European investment.

Report: A Global Shift: September 2017

AI to drive GDP growth – PwC

BY Richard Summerfield

Across a wide spectrum of industries there is burgeoning excitement around the implementation and applications of artificial intelligence (AI). While there will be myriad challenges with properly leveraging AI, a new report from PwC suggests that global GDP could be up to 14 percent higher in 2030 as a result of AI – the equivalent of adding an additional $15.7 trillion to the global economy.

Though AI is, in some respects, a mystery for many organisations, in terms of how it will impact them and alter their business models, it is important for companies to embrace AI where possible. AI can enhance many different areas of organisations’ businesses, according to PwC, which, in turn, will drive economic gains.

Productivity will be boosted by companies automating processes using robots and autonomous vehicles. Companies will also be able to augment their existing labour forces by installing AI technologies, including assisted and augmented intelligence. Consumer demand will also be altered by AI. Personalised and higher-quality AI-enhanced products and services will drive consumer activity.

The report notes that all regions of the global economy will experience benefits from AI, including North America, China, Europe and developed Asia. China will see GDP grow by 26 percent to 2030, and North America will receive a 14.5 percent boost. However, emerging markets will see more modest growth in the coming years, at less than 6 percent of GDP, due to lower AI adoption rates forecast for Latin America and Africa.

According to the report: “The ultimate commercial potential of AI is doing things that have never been done before, rather than simply automating or accelerating existing capabilities. Some of the strategic options that emerge won’t match past experience or gut feelings. As a business leader, you may therefore have to take a leap of faith. The prize is being far more capable, in a far more relevant way, than your business could ever be without the infinite possibilities of AI.”

On a sectoral basis, the industries most likely to benefit from the emergence of AI will be retail, financial services and healthcare, thanks to improvements in productivity, product value and consumption.

Report: PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution

Gilead builds cell therapy franchise with $11.9bn acquisition of Kite Pharma

BY Fraser Tennant

As part of its efforts to build an industry-leading cell therapy franchise, Gilead Sciences, Inc. has announced the acquisition of biopharmaceutical company Kite Pharma, Inc. in a deal worth approximately $11.9bn.

Under the terms of the definitive agreement, a wholly-owned subsidiary of Gilead will commence a tender offer to acquire all of the outstanding shares of Kite’s common stock at a price of $180 per share in cash. Following successful completion, Gilead will acquire all remaining shares not tendered in the offer through a second step merger at the same price as in the tender offer.

“The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers,” said John F. Milligan, Gilead’s president and chief executive. “The field of cell therapy has advanced very quickly, to the point where the science and technology have opened a clear path toward a potential cure for patients. We are greatly impressed with the Kite team and what they have accomplished, and share their belief that cell therapy will be the cornerstone of treating cancer.”

An industry leader in the emerging field of cell therapy, Kite uses a patient’s own immune cells to fight cancer. Following completion of the transaction, Kite’s research and development, commercialisation operations and product manufacturing will remain based in California.

“We are excited that Gilead, one of the most innovative companies in the industry, recognised the talent that is unique to Kite and shares our passion for developing cutting-edge and potentially curative therapies for patients,” said Arie Belldegrun, chairman, president and chief executive of Kite. “With Gilead’s expertise and support, we hope to rapidly accelerate our next-generation research and manufacturing technologies for the benefit of patients around the world.”

Acting as financial advisers to Gilead are BofA Merrill Lynch and Lazard, while Centerview Partners is acting as exclusive financial adviser to Kite. Further advice to Kite was provided by Jefferies LLC and Cowen and Company. Serving as legal counsel to Gilead is Skadden, Arps, Slate, Meagher & Flom. Sullivan & Cromwell LLP and Cooley LLP are serving as legal counsel to Kite.

Unanimously approved by both the Gilead and Kite boards of directors, the Gilead/Kite transaction is expected to close in the fourth quarter of 2017.

Mr Milligan concluded: “Gilead’s and Kite’s similar cultures and histories of driving rapid innovation in order to bring more effective and safer products to as many patients as possible make this an excellent strategic fit.”

News: Gilead to Buy Kite, Maker of Cancer Treatments, for $11.9 Billion