Smurfs Caught Short as Jakks Toy Bid Seen for 20% Less: Real M&A

Jakks Pacific Inc. (JAKK), which rejected the cheapest offer for a toy company on record, may now have to accept an even lower bid after the maker of Hello Kitty, Pokemon and Smurfs character goods cut its sales forecast.

Jakks, which received an unsolicited offer of $20 a share from Oaktree Capital Management LP in September, turned it down three weeks later and said the buyout firm was trying to “take advantage” of adverse economic conditions to acquire the company on the cheap. The bid valued Jakks at 0.52 times its revenue, less than half the median for toy takeovers over $100 million, according to data compiled by Bloomberg.

With Jakks losing 20 percent of its value after saying last month that sales for 2011 would fall short of its own estimates, the company is now worth less than it was before Oaktree’s offer emerged. While Jakks is betting that its Monsuno action figures, which target 6- to 11-year-old boys and are based on a Japanese animated television series, will help increase returns for shareholders, Needham & Co. says that Oaktree could chop its takeover proposal by as much as 20 percent to $16 a share.

“Things have changed,” Sean McGowan, an analyst at Needham in New York, said in a telephone interview. “What’s most likely is that Oaktree does come back at a lower price than $20. This collection of assets, as it currently stands now, managed differently could probably produce a lot more profit. I’d be surprised if they didn’t come back.”

John Christiansen, a spokesman for Los Angeles-based Oaktree, didn’t return a telephone call seeking comment. Joel Bennett, chief financial officer at Malibu, California-based Jakks, declined to comment on whether it was considering a sale.

Dog Toys, Fairies

Founded in 1995, Jakks sells everything from swimming pool water guns and dog toys to fairies and princess costumes. Many of its items are based on brands that it licenses from Walt Disney Co., Warner Bros. and the Ultimate Fighting Championship mixed martial arts league, according to its website.

Since reaching a record of $31.04 a share in 2007, Jakks lost half its value to end at $15.26 yesterday. The decline was four times the drop of the 109-stock Standard & Poor’s SmallCap Consumer Discretionary Index. Jakks slipped 0.7 percent to $15.15 today.

Shares of Jakks jumped as high as $19.88 after Oaktree, which oversees about $73 billion, said in a Sept. 14 statement that it planned to acquire the toymaker for $20 a share. The proposal valued Jakks at 52 cents for every dollar of sales, or 40 percent less than any other toy acquisition of more than $100 million, data compiled by Bloomberg show.

The median deal was valued at 1.07 times revenue.

Intrinsic Value

Oaktree announced its offer after saying that Jakks’ management has since March “repeatedly rebuffed” its proposal to take the company private. On Oct. 5, Jakks said it rejected Oaktree’s bid, saying the offer represented an attempt to buy the company below its “intrinsic value.”

Last month, Jakks cited a “difficult” sales environment for toys during the holiday season in chopping its full-year revenue forecast. The company now expects sales to decline for the third consecutive year.

The Dec. 16 announcement caused its stock to tumble by the most in seven years, increased concern consumers are turning to toys made by its larger rivals Mattel Inc. (MAT) and Hasbro Inc. (HAS) and raised speculation that Jakks may be left without a buyer.

“I’d be kind of surprised if any bid were to happen now,” Colin Symons, chief investment officer at Symons Capital Management Inc. in Pittsburgh, which oversees $450 million and owns shares of Jakks, said in a telephone interview. “While obviously I’d like a buyout, I’m not holding it for a buyout.”

Saving Earth

While Jakks’ management has refused to engage in discussions at $20 a share, the company’s sales slump gives Oaktree a chance to lower its proposal and still appeal to some shareholders, according to Scott Hamann, a Cleveland-based analyst at Keybanc Capital Markets Inc.

The stock is still about 5 percent below its price when Oaktree announced its bid in September, even after rallying from a low of $13.36 this month, data compiled by Bloomberg show.

Oaktree, which owned about 5 percent of Jakks as of Sept. 30, could reduce the number of licensed toys the company sells to boost profitability, according to Needham’s McGowan. Jakks’ joint venture to produce action figures based on the Monsuno series, in which kids command creatures in a battle with evil forces to protect Earth, could also attract Oaktree, he said.

Jakks gets about 75 percent of sales from toys based on brands controlled by other companies and owning a piece of Monsuno would let Oaktree reap greater profits if the adventure series gains popularity, Keybanc’s Hamann said.

Smelling Blood

Oaktree can also take advantage of Jakks’ cash holdings, he said. Jakks has $232 million in cash and short-term investments, equal to almost 60 percent of its market value, data compiled by Bloomberg show.

“The valuation is obviously very attractive right now on basically any metric you look at and that’s a function of management not executing,” Hamann said. “Shareholders, in the wake of the hit they took at the end of last year, are going to be more interested in what a potential buyer has to say. The sharks have to be smelling some blood in the water.”

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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