Up Close: IPI for Sale? It's All Grand, in Varda's Opinion

By Brent Felgner -- Playthings, 2/7/2008 3:52:00 PM

Parsippany, N.J.—When entrepreneur Jeff Hsieh ambitiously began piecing together what he envisioned would ultimately become the third or fourth largest toy company in the world, he left no quarter for failure, no space for anything less than total success. Some suggested his vision for Grand Toys International was grandiose; Hsieh simply saw it as grand.

But the company has fallen on hard times. Whether the result of a downturn in the economy, backlash from the seemingly unending series of toy recalls this year, underperformance of non-toy divisions or—perhaps more fundamentally—a flawed or poorly executed business plan, Grand as been losing money and hemorrhaging cash. For the first half of 2007, the company’s sales fell 16.8 percent, gross margins plummeted to 17.6 percent and it reported a $9 million net loss, according to the last financial report the company filed at the end of the year.

Seeing those losses coming, and after agreeing with auditors that the company might not be able to continue as a going concern, Hsieh last November engaged Navigant Capital Advisors to seek “strategic options,” including possible sale of the company. After Hsieh further propped up the company with secured loans at high interest rates or extensions he threaded through his personal funds and other lenders, the company went silent. Almost. 

The process undoubtedly has been difficult for Grand’s most successful subsidiary, International Playthings, which by all accounts is the bright spot in Grand’s portfolio. Through it all, president Mike Varda has tried to remain focused on the task at hand—serving the company’s broad base of specialty toy stores and keeping the pipeline full and flowing. Varda, who is also IPI’s former chief financial officer, was one of the owners of the company prior to its sale to Grand.

“IPI is doing wonderfully. Grand is doing wonderfully. We’re restructuring,” he told Playthings in a recent telephone interview from Hong Kong, where he was attending business meetings. “It’s my belief that we stay together as we are. I don’t think anything should be read into the [recent restructuring news] that IPI is for sale. We’re getting ready for Toy Fair and getting our 2008 budgets ready,” he noted.

“IPI is an exceedingly healthy company. We have been profitable for 40 years and there’s nothing that’s happened since we’ve been a part of Grand [since 2005] to diminish that,” he said, adding, “Grand is looking at all the alternatives on how to right the ship. We’re working very hard to make the entire company viable.”

As previously reported, Grand shed two-thirds of its toy-related business units during 2006: Grand Toys Ltd., the Canadian toy distributor; Grand Toys International Inc., the North American mass market distributor; and Gatelink, a mould manufacturer based in China. Grand also terminated various toy licenses, including its rights for Binney & Smith's Crayola dough and for various soccer action-figure licenses.

Grand is a closely held public company; Hsieh owns more than 86 percent of the thinly traded ADSs (American Depository Shares). Last July, Centralink, a private investment bank controlled by Hsieh, provided the company with a $2 million revolving loan for one year at 15 percent, in order to provide working capital and an additional assurance to other lenders. The loan was collateralized by Grand’s pledge of its equity interest in IPI and another subsidiary, Kord. Hsieh essentially securitized his own interest in Grand through the move, thus limiting the ability to fully dilute his interest and at least partially protecting him in a worst-case situation.

Representatives of Navigant declined to comment or did not return calls.