ZANY BRAINY BUY USES COOL LOGIC OWNERS EXPECT BANKRUPT CHAIN WILL RETAIN ITS STRENGTH AT CORE.

Byline: Gregory J. Wilcox Staff Writer

Waterton Management LLC's $115 million buyout of specialty toy retailer Zany Brainy Inc. is a no-brainer, analysts said Wednesday.

The Los Angeles investment firm bought the financially troubled company on Tuesday but the deal must first be approved by the U.S. Bankruptcy Court and a hearing has been set for Aug. 10. Both parties expect the deal to close before Labor Day.

Jim Silver, publisher of the Toy Book, a New York City-based trade publication that tracks the segment, said that it's a plus Waterton bought the company because it is familiar with the toy industry.

``Waterton is very involved with (Westlake Village-based) The Right Start and Zany Brainy is still considered a very viable retailer in the marketplace,'' he said.

Zany Brainy, based in King of Prussia, Pa., filed for Chapter 11 bankruptcy protection in May and listed assets of $201 million and liabilities of $131 million.

Analysts say the core business is sound but that the company got battered by the dot-com implosion and an overly aggressive expansion.

Thomas Vellios, Zany Brainy's chief executive officer, characterized the bankruptcy filing as a strategic move.

Kenneth J. Abdalla, a managing member of Waterton Management, said in a statement that Zany Brainy's Chapter 11 filing resulted from liquidity problems and that this is a good acquisition.

``In a market that is riddled by consolidation and liquidation, one brand consistently stands out in terms of providing the merchandise and shopping experience that kids love and parents trust. That brand is Zany Brainy,'' he said.

The company sells toys geared to the intellectual growth of children while violent toys are banned from its stores.

The company's problems hit last year. First, they had a lousy experience with their online site and Silver thinks the company lost much more than the published figure of $9.3 million.

Zany Brainy also opened 27 new stores and bought Noodle Kidoole, a mall-based competitor, but had trouble integrating that company. The company, which caters to the upscale market, operates 187 stores nationwide.

After the deal closes, Zany Brainy will transfer substantially all of its employees, assets and certain liabilities, to a newly created subsidiary whose operations are not subject to the bankruptcy proceedings.

Waterton Management will arrange for a new secured loan facility for this subsidiary.

Kurt Barnard, president of Barnard's Retail Trend Report, said that Zany Brainy is a valuable franchise that deserves to survive.

``It's a very pleasant shopping experience and most of the toys are of a primarily educational nature. The toys are carefully selected to be constructive to the lives of the kids,'' he said.

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Photo: (1 -- 2 -- color) Zany Brainy stores like this one in Woodland Hills sell toys that encourage kids' intellectual growth and downplay violence. The Woodland Hills Zany Brainy store, one of 187 nationwide, will likely be transferred to its owners' new subsidiary.

Phil McCarten/Staff Photographer