Even as Bain’s debt increased the company’s costs,
store revenue fell, making those debt payments harder to pay. In 2002, Bain had the company take out more debt to help finance a dividend recapitalization (a fancy term for when a company borrows money, not to finance actual business operations, but to pay dividends…) that sucked $120 million out of the company and put $85 million in Bain’s pockets alone. Payouts like that are usually only a thing when a company performs really well, but Bain wanted its ROI NOW NOW NOW, even if that meant piling more debt onto the company. And since dividends were taxed at a lower rate than capital gains, it was an even easier way for the Bain boys to get rich(er) quick.
Shortly after Bain’s takeover,
Napa County, CA sued KB for deceptive pricing and reselling returned toys as new, and in a
separate class action alleging deceptive pricing. Both cases settled in 2003, with Big Lots picking up the tab — not Bain.
By 2004, Bain had bankrupted KB, resulted in the
loss of thousands of retail and warehouse jobs. Another private investment firm then
took ownership of the company. KB’s online assets, including eToys.com, and inventory were
sold to D.E. Shaw, an investment firm that was buying up financially distressed toy retailers at the time.
In 2005, a
group of creditors sued Bain and KB execs in Delaware, arguing that the 2002 dividend recap was done “when the economy and the company’s business was declining and had a ‘devastating impact’ on the Pittsfield-based chain of mall-based toy stores,” making the payout improper. Bain tried to get the court to declare that these creditors didn’t have standing to sue them for fraudulent conveyance in the matter, which would essentially
block other creditors from suing them for it as well.
Big Lots, KB’s previous owner, also
sued Bain outside of the bankruptcy court, accusing Bain of fraud and shorting them $45 million still owed on the sale, but the case was dismissed for being improper outside of the bankruptcy proceedings.