Could Hasbro Become Mattel’s White Knight?

Streetwise for Sunday, December 3, 2017

This is the holiday shopping season so let’s talk toys; from an investment perspective of course. Retail toy sales for 2017 are expected to chalk up a growth rate of 3.4 percent over last year. In addition, online and other non-store sales, which are included in the overall figure, are expected to increase 7 to 10 percent year-over-year.

Although the toy space is potentially a very lucrative, being a $100 billion industry worldwide, it is also a very challenging. Seasonality lives here at the extreme.

Technological change is accelerating. Licenses account for more than 30 percent of all sales and are driven by big screen movies watched by capricious kids. Sales are often in established markets with miniscule population growth, although emerging markets are becoming increasingly important.

One major toy industry player that has always been a leader is Mattel (MAT). Unfortunately, today that not the case. While Mattel has several established core brands including Barbie, Fisher-Price, and American Girl, the company has fallen on hard times of late. The situation boiled over with the declaration of bankruptcy by Toys-R-Us.

Moreover, Mattel is still trying figure out how to fill in the crater left in its income statement from when Disney moved its Princesses license over to Hasbro in 2016.

Barbie did receive a bounce after Mattel introduced new body types and looks, but that has not been sustainable. American Girl has tried to shake things up with new offerings aimed at younger girls with limited success.  Mattel refers to the dolls, along with Fisher-Price, Thomas & Friends and Hot Wheels, as its power brands, although they seemed to have lost power.

Then there is Hasbro’s unsolicited offer to acquire Mattel. Hasbro is currently worth approximately $11 billion, while Mattel is worth about $5 billion. The merger would put Barbie, Transformers, Nerf and Hot Wheels under one roof, not to mention licenses for both DC and Marvel, creating a truly dominant market player.

Shares of Mattel are down about 47 percent this year, due to the slackening demand for Barbie. Meanwhile, Hasbro’s shares are up over 23 percent since January, in part because of the company’s grip on the “Star Wars” toy franchise.

If merged, the two companies could control as much as 34 percent of the toy market in the United States. In fact, the two companies would likely control all the major toy brands except The Lego Group.

Last year, Hasbro wrangled the licensing rights to Disney’s Star Wars franchise from Mattel, in addition to grabbing the rights to the lucrative Disney Princess dolls. Still, the prospect of Hasbro buying Mattel is likely to alarm licensors like Disney.

Mattel has informed Hasbro its unsolicited proposal undervalues the company and does not take sufficiently consider the potential for regulators to reject the deal based on antitrust concerns.

In my opinion, a proposed merger would not upset the government, especially when you consider that new entrants into the marketplace, such as Chinese robot maker UBTech Robotics, make even a combined Hasbro-Mattel entity look less intimidating.

UBTech manufactures humanoid robots such as the $300 Star Wars First Order Stormtrooper Robot, which was developed in partnership with Disney.

Finally, Margo Georgiadis, Mattel’s CEO, is new to the job. She was hired in January of this year. It would do nothing for her resume if the former Google executive leaves prematurely without proving herself capable of turning Mattel around. Yet, she and several other new executives at Mattel know little or nothing about the toy industry.

Therefore, it would come as no surprise if she tried to persuade Mattel’s board to reject a sale to Hasbro or any other company. Moreover, the board would likely show some disdain for a deal at a time when Mattel is, in their opinion, undervalued. Meanwhile, time is on Hasbro’s side. And it could become a white knight should Mattel’s fortunes sink further. 

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.