Permira links with Apollo to join Toys 'R' Us auction

Permira, the private equity firm that owns New Look, has moved to increase its exposure to the retail sector by bidding for Toys 'R' Us, the struggling toy chain.

Permira, the private equity firm that owns New Look, has moved to increase its exposure to the retail sector by bidding for Toys 'R' Us, the struggling toy chain.

The European buyout group, which has teamed up with a US rival, Apollo, emerged yesterday as one of about six bidders to reach the second round of a $3.5bn (£1.8bn) auction for the toy store group. Toys 'R' Us was put up for sale in August after years of underperformance.

Ever since Permira banked more than £600m profit from the sale of Homebase, the home improvement group, to GUS two years ago, it has been seeking another retail deal. It bought New Look, the discount fashion retailer, early last year and spent months stalking WH Smith this summer before the newsagents' pension fund deficit scared it away. Permira's attempt last year to acquire Debenhams, the department store group, was stymied by CVC Capital Partners and Texas Pacific.

Final bids for Toys 'R' Us are due after the Christmas trading period, when toy stores make the vast majority of their profits. Credit Suisse First Boston, the investment bank, is handling the auction, which has attracted interest from CVC, Kohlberg Kravis Roberts, Bain Capital and Cerberus. Toys 'R' Us's vast property portfolio - it owns about 680 sites in the US - has also sparked interest from US property groups. Michael Goldstein, the former chairman and chief executive of Toys 'R' Us, is also believed to be interested in buying the group.

Although Toys 'R' Us is one of the UK's top three toy shop groups, its market share has dwindled in the US amid heightened competition from general retailers such as Wal-Mart and discounters such as Target. FAO Schwarz and KB Toys, two rival toy retailers, have both collapsed into bankruptcy during the past 12 months. Wal-Mart ignited a price war last Christmas by slashing prices on key toys even earlier than normal, later forcing FAO Schwarz to sell its famous giant bronze bear in Boston to ward off its creditors.

Permira and Apollo, which specialises in buying distressed US companies, worked together earlier this year on the $5bn acquisition of Intelsat, the Bermuda-based satellite operator.

The New Jersey-based Toys 'R' Us, which revolutionised the toy industry with its big-box, low-price strategy in the 1980s and 1990s, is not seeking a buyer for its faster-growing Babies 'R' Us division. In August it said it wanted to operate its two divisions as separate entities next year. There are more than 500 Toys 'R' Us stores in 29 countries outside the US, which are run either on an operated, licensed or franchised basis. It also has an online arm, toysrus.com. Permira and Toys 'R' Us declined to comment.