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Turnaround Firm Buys FAO for $41M

Several elements of FAO Schwarz, including its New York and Las Vegas stores and its catalog and Internet operations, have been sold to a member of the D.E. Shaw group of companies.

The deal, announced yesterday by bankrupt parent FAO Inc., King of Prussia, PA, was valued at $41 million.

“We had three parties bidding Thursday during an auction that lasted from 10 a.m. until 2 or 2:30 a.m. Friday morning,” said Paul Traub of Traub, Bonaquist & Fox LLP, counsel for the Official Committee of Unsecured Creditors.

Traub listed the parties as Q Investments, Fort Worth, TX; a joint venture of Macklowe Properties and Hasbro; and D.E. Shaw. Macklowe Properties owns the General Motors building where the flagship FAO Schwarz store in New York is located.

“It's a hot asset, so it went for a long time,” he said. “It was spirited bidding in an extended auction. It just kept moving up. It's a great brand. It was very sophisticated bidding by sophisticated buyers.”

Approval was granted yesterday by Judge Joel B. Rosenthal of the U.S. Bankruptcy Court District of Delaware in Wilmington. The sale was supported by the company's official creditors committee and lender group.

The acquirer is a wholly owned subsidiary of D.E. Shaw Laminar Portfolios LLC. Its activities include the use of capital to restructure companies in financial distress. D.E. Shaw Laminar Portfolios is a member of the D.E. Shaw group, New York, an investment and technology development firm with about $7 billion in aggregate capital.

Max Holmes, a managing director of D.E. Shaw & Co. L.P. and head of the firm's distressed securities group, indicated that the acquisition was motivated in part by a belief that FAO Schwarz's value would be maximized by a return to a focus on distinctive, high-end specialty toys offered in a limited number of stores.

“We're going to try and revive online and catalog,” Holmes said last night via cell phone as he was returning from Delaware. “FAO had a fantastic catalog at one time, and we hope to revive it.”

When asked how that would be accomplished, he added, “You have to follow Neiman Marcus — good lists and unique merchandise.”

He declined to provide specifics of further information regarding the revival.

“We'll be the owner, not the expert in direct marketing,” he said. “[It has a] fantastic brand name with two spectacular locations. We see a lot of potential.”

The New York and Las Vegas stores are expected to reopen after renovations projected to take four to six months.

FAO said the acquisition did not change its earlier-stated position that it does not expect any recovery would be available to its common stockholders in connection with its bankruptcy.

A call to the Las Vegas store revealed that the location closed Sunday. The New York location also closed Sunday. “Look for us to reopen in the summer of 2004” was part of the recorded message being played for callers to the New York store yesterday.

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