Toys R Us $350 million mandatory convertibles talked at 6.25-6.75% yield, up 18-22%

By Ronda Fears

Nashville, Tenn., May 14 - Toys R Us Inc. launched $350 million of three-year mandatory convertibles talked to yield 6.25% to 6.75% with an 18% to 22% initial conversion premium; a roadshow is set to begin Wednesday. The deal is scheduled to price after the close Tuesday, May 21, via joint book-running lead managers Credit Suisse First Boston and Salomon Smith Barney.

The convertible will be non-callable.

Toys R Us is also selling 11.5 million shares of common stock.

Co-managers of the offerings include Wachovia Securities, Banc One Capital Markets and Royal Bank of Scotland.

The Paramus, N.J.-based toy retailer plans to use proceeds to repay short-term debt and for general corporate purposes.

Deutsche Bank Securities convertible analysts said at the midpoint of price talk the mandatory is about 1.8% cheap, assuming a credit spread of 300 basis points over Libor and 40% volatility in the stock.

Toys R Us shares closed up 21c to $17.30, benefiting from the market's positive reaction to U.S. retail sales figures released Tuesday as well as higher guidance released by the company on Monday. The company plans to release earnings on Monday, May 20 before the market open.

Toys R Us said it expects to report fiscal first quarter results that are better than current consensus estimates, projecting a loss per share between 2c and 3c versus the analyst consensus of a loss of 9c per share. The company reported a net loss of $18 million, or 9c per share, for fiscal first quarter 2001.

Total net sales for the quarter increased 2%, to $2.1 billion, compared to the quarter a year ago, the company said. Comparable sales were down 2% in the U.S. but up 10% in International stores, and up 3% in the Babies R Us division. Sales at Toysrus.com increased 57% to $46 million from $29 million.

"Our attention to gross margin improvements and ongoing expense reduction initiatives lead us to expect that we will improve operating results for the first quarter," said John Eyler, chief executive officer of Toys R Us.

"In particular, operating earnings in our U.S. toy stores and our Babies R Us stores are anticipated to exceed prior year results. We also believe that we will reduce operating losses at Toysrus.com for the quarter."

On Monday, after releasing the earnings report, Toys R Us has scheduled a conference call.

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