Consumer

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Will the third time be the charm for these toy makers?

Hasbro Inc., the giant behind brands such as Nerf and My Little Pony, reportedly has made an offer to acquire Mattel Inc., the maker of Barbie and Hot Wheels. The deal would create a formidable playtime empire by combining the two largest U.S. toy makers.

There are several reasons why it makes sense for these companies to join forces, especially given the changes in their industry right now.

To unlock more growth, both Hasbro and Mattel need to focus heavily on international shoppers. As Mattel CEO Margo Georgiadis noted in a presentation earlier this year, some 62 percent of the growth in the global toy industry over the next four years is expected to come from emerging markets.

A Bigger Toy Chest
The toy industry is poised to add $20 billion in sales by 2021, and most of that growth will come from emerging markets
Source: Mattel, Euromonitor International

Mattel and Hasbro could each benefit from lessons the other has learned about courting consumers in fast-growing markets, and they could use their combined scale to make inroads in such places more quickly.

Both companies are also being forced to redefine their core competencies. Their business is increasingly about more than just making physical objects from brightly colored, molded plastic. Content is now an important part of the equation, whether that means creating a standalone app, videos for YouTube Kids, or even a splashy, big-budget movie. Innovation, too, will matter more as voice assistants, virtual reality and other new technology becomes more mainstream.

Again, you can see how shared learning could be important here. Hasbro took the plunge into silver-screen content this year with the theatrical release of a "My Little Pony" movie. Mattel, with products such as its Internet-connected, voice-activated Hello Barbie and Dreamhouse, has broken new ground on putting technology in old-school toys. They can help each other apply these formulas across their wide array of brands. 

The duo have been in talks before: In 1996, when Mattel was the would-be acquirer; and again early last year, with Hasbro in the driver's seat

A Different Beast
Mattel's eroded earnings means any deal would value the toy maker at a lofty multiple

But since reported discussions in February 2016, Mattel's shares have more than halved (before a big jump on Monday), while Hasbro's gained roughly 30 percent. Though Hasbro lagged the S&P 500's 35 percent gain over that period, it comes armed with a much stronger currency to support any stock-and-cash deal. Such a structure would be likely, as retailers have seen the carnage that can come with taking on big debt loads. 

Window of Opportunity
Hasbro reportedly approached Mattel in early 2016. The latter's underperformance since then has made it all the more vulnerable.
Source: Bloomberg

Mattel's shares surged roughly 20 percent on Monday on news of a potential deal, but any Hasbro offer will surely top that. Assuming a deal is funded equally by cash and stock, and factoring in a conservative cost-savings estimate of $500 million , Hasbro has the capacity to stretch to around $25 a share and strike a deal that's still immediately accretive to earnings, according to data compiled by Bloomberg. To be sure, it may not have to reach as deep into its pockets, in part because of the headwinds its target faces.

All of Mattel's major divisions saw dismal sales in the latest quarter -- partly because of fallout from the Toys R Us Inc. bankruptcy, but also because it's struggling to make the most of still-powerful brands such as American Girl and Fisher-Price. 

Across-the-Board Struggle
All of Mattel's major business units saw steep sales declines in the third quarter
Source: Bloomberg
Girls and Boys Brands includes Barbie, Hot Wheels, and several other brands

Given the problems at those and other of its power brands, Mattel isn't the company it once was. After earning nearly $1.4 billion in 2013 and $823.5 million last year, it's projected to deliver just $459 million this year. 

Though Mattel is undoubtedly in a tough spot, it may not be receptive to Hasbro's overtures. Georgiadis has been on a hiring spree, bringing in Joe Euteneuer for the CFO role and adding a new chief people officer, chief communication officer and chief technology officer. Such moves suggest she is digging in at Mattel and trying to rebuild the company from within, which might make her none too eager to run into the arms of a rival.

That said, she may find herself without better options. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. To be sure, some cost savings may be offset by lost earnings that may arise from the forced loss of licensing contracts with companies like Disney and Warner Bros. to appease competition concerns.

To contact the authors of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net