Taxman takes ailing Toys R Us to the brink with £15m VAT demand

Toys R Us UK faces crashing into administration at the end of the month unless it can find new investors prepared to shoulder a £15m tax bill.

Sky News has learnt that advisers to Britain's biggest standalone toy retailer are racing to secure a rescue deal for the business by the middle of next week, just days ahead of a 27 February deadline to meet a mammoth VAT demand.

Sources said the company, which employs more than 3,000 people in the UK, would work through this weekend in an effort to progress talks with potential bidders.

The Entertainer, a privately owned chain, and Alteri Investors, an acquirer of distressed retailers, are understood to have held talks in the last fortnight about buying parts of Toys R Us UK, although their ongoing interest was unclear on Friday.

Hilco Capital, which salvaged the music and entertainment retailer HMV in 2013, is understood to have tabled a proposal that would involve taking on only a minority of Toys R Us' 105 British outlets.

Hilco is likely to remain interested in a deal only if it is structured as a pre-pack administration, according to a source close to the process.

Sky News revealed earlier this month that advisers to Toys R Us were racing to secure bids for the loss-making business - which only made it through Christmas after investors backed a major financial restructuring involving the closure of a quarter of its shops.

The entire European operations of the ailing retailer are also on the market, encompassing 236 stores outside the UK in 10 countries including Austria, France, Germany and Spain.

Toys R Us' UK and European businesses are being sold through separate processes being run by Lazard (Frankfurt: A0DQP8 - news) and Alvarez & Marsal.

With (Other OTC: WWTH - news) only 11 days remaining before the £15m VAT bill is due, the prospect of Toys R Us UK avoiding insolvency proceedings look increasingly bleak.

Such a move would cast grave doubt on the future of a brand which has had a presence in the UK since 1985 - along with about 3,200 workers.

Poor Christmas trading has left the British business facing cashflow issues, with one insider saying earlier this month that it looked "close to unsaveable".

Weak retail sales growth data published on Friday by the Office for National Statistics added to the sense of pessimism engulfing the high street.

Toys R Us UK has already been planning to shed up to 800 jobs through a process called a company voluntary arrangement (CVA), which was approved by creditors just three days before Christmas.

‎The CVA is intended to provide breathing space for Toys R Us UK to improve its fortunes by closing 26 of its loss-making stores and securing big rent reductions at many others.

Under that plan, which won the backing of 98% of creditors, including the Pension Protection Fund (PPF (Shenzhen: 300258.SZ - news) ), its loss-making larger stores are due to begin closing in the spring.‎

The CVA deal secured the 11th-hour support of the PPF after the company agreed to pay almost £10m into its pension scheme over the next three years.

Without a new owner being found, the Toys R Us UK pension scheme - which is tens of millions of pounds in deficit - will be absorbed by the PPF.

Any such move is set to attract renewed attention from Frank Field, the Labour chairman of the Commons Work and Pensions Select Committee.

Shortfalls in defined benefit pension schemes are facing intense scrutiny following the collapse of Carillion (Frankfurt: 924047 - news) , the construction group which fell into liquidation with a Section 75 pension deficit of £2.6bn.

Specialist toy retailers endured tough festive trading amid competition from Amazon and other online rivals, with Toys R Us now planning to close about 180 US shops - roughly 20% of the total - in the coming months.

In the UK, retailers including BHS, Focus DIY and JJB Sports have previously used CVAs to exit loss-making stores, although all three companies ultimately succumbed to the fast-changing retail environment.

New Look is now working on a similar plan, while House of Fraser is seeking rent reductions from landlords.

The effort to overhaul its UK estate follows the filing by Toys R Us' American parent for chapter 11 bankruptcy protection in September.

There has since been controversy over payments to UK executives and the write-off of a big loan owed to the UK company.

When the CVA was approved, Steve Knights, the managing director of the UK business,‎ hailed the "strong support for our business plan... so that we can better serve our customers today and long into the future".

A source said the full list of European countries where Toys R Us' operations were on the market also included Denmark, Finland, Iceland, Norway, Poland and Portugal.‎

In the US, Toys R Us has won a court order to allow it to retain liquidators to close nearly 200 of its shops.‎

A spokesman for Toys R Us UK declined to comment.