A child looks at toys at a Toys R Us in Texas on Oct. 7, 2009. (Joyce Marshall/Fort Worth Star-Telegram/MCT)

Reuters | Toys R Us filed to raise as much as $800 million in an initial public offering in what could mark its return to the public markets after five years. But investors’ appetite for Toys R Us, which was taken private in 2005 by Kohlberg Kravis Roberts & Co Bain Capital, and shopping center operator Vornado Realty Trust in a $6.6 billion deal, will depend on how much of the money raised will go to its current owners and how much will go to fund growth.

Those three companies collectively own 98.2 percent of Toys R Us, but
the prospectus filed Friday with the Securities and Exchange Commission
did not specify whether they would shed any of their stakes in the
eventual IPO.

Toys R Us, based in Wayne, New Jersey, said only in the filing that it
plans to use the net proceeds of the offering to pay down some of its
debt, without getting into specifics.

A recent slew of private-equity backed IPOs have flopped because they were seen as exit vehicles for buyout firms. Toys R Us and its underwriters will have to price the IPO sensibly and make clear it will leave the retailer equipped to compete with other retailers, an analyst said.

“Right now, I don’t believe there is a good market whatsoever for private equity backed companies. It’s hard enough to launch an IPO, but much tougher for a debt-laden company,” said Scott Sweet, a senior managing partner with IPO Boutique.

Toys R Us’ long-term debt load of $5.2 billion could be a turn-off for investors, Sweet said.

The filing did not specify the number of shares, or a price range estimate, information that typically comes in shortly before an IPO is launched. Nor did it provide an approximate timing for the stock flotation.

For now, Friday’s filing is likely to be a “trial balloon” to allow the underwriters, led by Goldman Sachs , to gauge investor appetite for the IPO, according to various pricing scenarios, Sweet said.

Given the recent spike in stock market volatility, which makes IPOs very hard to launch, a Toys R Us IPO is likely to be “months away,” Sweet said.

Toys R Us is the largest specialty toy store in the United States but has faced stiff competition from retailers such as Wal-Mart Stores Inc, Amazon.com Inc and Target Corp.

Toys R Us operates 1,363 stores around the world under its own name, as well as the Babies R Us and FAO Schwarz chains, making it one of the more prominent names in the U.S. pipeline.

But Sweet warned name recognition alone is not enough to whet investor appetite. Investors typically want to see fast sales and profit growth to justify taking on riskier IPO stocks.

Toys R Us sales have been stagnant for a number of years. In the fiscal year ended in February 2007, sales were $13.1 billion, and had only risen to $13.6 billion last year.

But during that period, its net profit nearly tripled to $312 million, as the retailer cut back on costs and kept its store count relatively stable.