Funtastic snaps up Toys R Us, launches recapitalisation

Toys R Us closed the doors of its physical stores but the brand will now continue online under the new ownership of Funtastic.

Toy distributor Funtastic has confirmed the acquisition of Australian e-commerce websites Toys R Us and Babies R Us as it also announces a recapitalisation.

Funtastic will also embark on a $29m equity raising by way of a fully underwritten placement through Cannacord Genuity and a debt for equity swap.

The acquisition of Toys R Us and Babies R Us was first flagged by DataRoom on Thursday and was confirmed to the market by the company Friday.

The toy brands are owned by Louis Mittoni’s company Hobby Warehouse Group.

Shareholders will vote on the transaction at the company’s annual general meeting on November 23.

Hobby Warehouse Group has one of Australia’s leading baby, toy and hobby e-commerce platforms with over 1 million subscribers.

The transaction is expected to provide immediate growth and diversification for Funtastic, particularly with respect to business-to-business operations, the company said.

Combined, the company’s revenue is about $53.2m, with synergies from the operation expected to return Funtastic to profitability.

Funtastic will pay Hobby Warehouse $32.6m for the business through its shares priced at 11.2c each. Mr Mittoni, who founded Hobby Warehouse, will be managing director of the merged company.

With respect to the equity raising, shares will be sold at 11.2c each and the company will convert $6m of its debt held with major shareholder, Jaszac Investments, to shares at the placement price.

The balance of the debt to Jaszac, which is about $3m, will be repaid from the proceeds of the placement.

Jaszac has also indicated that it may participate in the placement for up to $3 million.

Following the merger, Funtastic is expected to have a $20.7m net cash position and a $74m enterprise value.

Funtastic said the acquisition would expand Funtastic’s online reach, while its wholesale division is expected to benefit from a wider range of family oriented lifestyle products that complement Funtastic’s current brands which include Razor scooters, Chill Factor, Moochies, Learning Resources and Floaties.

Toys R Us and Babies R Us re-entered the Australian market in June 2019 following Hobby Warehouse Group’s acquisition of a licence agreement with Tru Kids, Inc., the US-based owners of the Toys R Us and Babies R Us brands.

This offered the exclusive rights to use the Toys R Us and Babies R Us brands in Australia and New Zealand.

“It’s been a challenging few years for Funtastic, however we have finally found the right vehicle to allow our brands and shareholders to accelerate growth within the fast growing online retailing space with two of the world’s most trusted children’s retail brands, Toys R Us and Babies R Us, which are complementary to our existing brands,” said chairman Bernie Brookes.

“The wider range of baby, toy and hobby products that will be distributed via the Funtastic distribution arm will allow us to develop more innovative digital and sourcing strategies to support both our physical and online retail customers in Australia.”

Mr Brookes said that he would step down as chairman of Funtastic following delivery of the strategic re-positioning of the company, in line with his commitment to Funtastic shareholders on appointment.

The new chairman would be former Crossmark Asia Pacific chairman Kevin Moore.

“We have been able to build one of the fastest growing online retailers in Australia and New Zealand, Mr Mittoni said.

“This is the next phase of the Toys R Us relaunch.

“We will continue to build new physical and digital logistics and shopper facing infrastructure to scale profitably.”

Funtastic, once a soaring small-capitalisation market darling, has struggled in recent years. An attempt to delist the company about two years ago failed and the board has been trying to turn around the underperforming business.

When Toys R Us collapsed in 2018, it was Funtastic’s fourth largest trading partner and it was forced to downgrade its full-year earnings guidance by as much as $1m.

For the 2020 financial year amid the COVID-19 disruption, Funtastic posted a $9.2m loss, a result 221 per cent lower than in the previous corresponding period when it delivered a $7.5m net profit from continuing operations.