Amidst all the media mergers, more M&A activity has been happening on the Island of Misfit Toys. Hasbro, Inc. (NASDAQ:HAS) apparently offered to buy up competitor Mattel, Inc. (NASDAQ:MAT) although no terms were revealed. MAT stock barely improved.
MAT has shot down the offer saying it undervalues the company. What’s likely to happen and what’s the best way to play it?
MAT stock sells and/or licenses and sells many huge brand names, including: Barbie, Monster High, Ever After High, Polly Pocket, DC Super Hero Girl, Disney Classics, Hot Wheels, Matchbox, CARS, DC Comics, WWE Wrestling, Minecraft, Max Steel, Little Mommy, BOOMco. and Toy Story.
Ever play with the Fisher-Price Little People growing up? I did. That’s Mattel’s property now.
So are BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, Disney Jake, the Never Land Pirates and Power Wheels. It also controls the mammoth success American Girl.
HAS is no slouch either, with owned or licensed brands including Cabbage Patch, Easy-Bake Oven, Furby, G.I. Joe, Jurassic Park, Lincoln Logs, Lite-Brite, Littlest Pet Shop, Marvel Legends, Mr. Potato Head, My Little Pony, Nerf, Play-Doh, Pokémon, Sesame Street, Star Trek, Star Wars and Transformers.
You’ve almost certainly played their board games including Battleship, Candy Land, Diplomacy, D&D, The Game of Life, Monopoly, Risk, Scrabble, and Trivial Pursuit. Oh yeah, and Jenga.
MAT Stock Merger Rundown
HAS stock has about twice the market cap of MAT stock, at about $12 billion. TTM revenues were $5.25 billion for HAS vs. $5.15 billion for MAT. TTM net income for HAS was about $592 million vs. only $65 million for MAT.
HAS has $620 million in TTM free cash flow while MAT had negative free cash flow of $135 million. HAS has $1.2 billion in cash offset by the same in debt, while MAT sits on $181 million in cash but is loaded with $1.88 billion in debt.
As we can see, HAS is running a far more efficient operation, given that it is managing about 11% margins on the same revenue as MAT, which is closer to 1.1%. That’s just plain ugly. Obviously that flows into the cash flow statement.
The Bottom Line on MAT Stock
What I see here is Hasbro aiming to gobble up all of Mattel’s juicy properties, and then consolidate manufacturing and marketing expenses. Obviously, Mattel is doing something wrong as far as expense controls. It is also in real trouble as far as inventory control.
Yet both chains got hit with they Toys R Us bankruptcy. That means the major pure-play retailer for all their products is going under, and that could put a big crimp on future revenues. It will harm Mattel worse, though.
One of the problems is that Mattel just got a new CEO. She wants to prove herself. Taking a buyout won’t do much for her reputation, and she’s not had a CEO job before.
It will be a real challenge to turn Mattel around, and if the situation there gets worse the next buyout offer will be lower. Also, the weaker Mattel gets, the less likely there will be an anti-trust pushback from the government.
I suspect the deal will not happen just yet. If Mattel falls back under $13, however, buying some stock or long term calls there may make sense for the speculative investor.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
