Will Tyco End Up In A Rival's Toybox?

You would think Richard E. Grey has one of the more enjoyable jobs in Corporate America. As chief executive of Tyco Toys Inc., the country's third-largest toymaker, he gets to fuss over radio-controlled trucks that squirt simulated python venom and dolls that wet their diapers. But though his eyes still give off a faint Willy Wonka twinkle, Grey is finding that the toy business is anything but fun and games.

Tyco is being squeezed. It lags far behind bigger and more powerful Hasbro Inc. and Mattel Inc. It's struggling to digest several acquisitions made from 1989 to 1992. And worse, a weak 1993 product line left the Mount Laurel (N.J.) toymaker with no breathing room: Tyco posted an operating loss of $56.9 million last year, compared to a $44.1 million profit in 1991, as sales slipped 5%, to $730.2 million.

And though Grey is making a big comeback bid by unveiling a slew of new toys at the American International Toy Fair, which began in New York on Feb. 14, many observers speculate that Tyco may be ripe for acquisition. Now that its stock price has fallen to 9 5/8 from a high of 23 in June, 1992, Tyco's market capitalization has dropped 58%, to just $333.7 million, or just above book value. That's just the kind of discount that's bound to attract acquisitive

Hasbro, the likeliest suitor, say analysts. Hasbro CEO Alan G. Hassenfeld is coy on the subject: "I could say the rumors are baseless, yet tomorrow, they might not be baseless."

Much of what ails Tyco is self-inflicted. From 1989 to 1992, Grey, 59 and a 21-year Tyco veteran, sought to diversify by snapping up Matchbox, View-Master/Ideal, Playtime, and the licensee for Sesame Street toys, financing much of the acquisition spree with long-term bonds. At the same time, Tyco opened six sales and marketing offices in the growing European market.

Grey acknowledges that the fast growth distracted Tyco's management from the critical task of product development. "We just had too much on our plate," he says. That became clear when Tyco's once-hot Little Mermaid dolls and Incredible Crash Dummies fizzled by early 1993--and Tyco had no new winners to fill the void. The subsequent drop in sales has made it harder for Tyco to pay down its $179.8 million in long-term debt.

HIT OR MISS? Now, Grey is fighting to regain lost ground. To bolster Tyco's balance sheet, he's trying to raise $50 million in a private equity offering. He has also sworn off any more acquisitions. More important, Grey is concentrating on new toys for 1994. At the Toy Fair, he introduced new products and line extensions that will account for 75% of Tyco's catalogue of more than 1,000 toys this year. He is hoping that such offerings as the Talking Magic 8 Ball, a new version of the 40-year-old fortune-telling toy, and the My Pretty TopsyTail hairdressing doll will generate some much-needed buzz to help pull the company out of the doldrums.

Analysts don't see an obvious hit in the lineup, though. "Nothing is a drop-dead, $50 million new category," says analyst John G. Taylor of L.H. Alton & Co. Like other analysts, Taylor doesn't have a firm 1994 forecast for Tyco, though he expects the company to climb out of the red. The lackluster reviews have only fueled talk that all or part of Tyco will be bought in the coming year. That's where Hasbro comes in. Some analysts believe Hasbro would love to add Tyco's radio-controlled cars and electric racing sets to its mix.

Not surprisingly, acquisition talk is a sore spot with Grey. "We believe that shareholders are better served by Tyco [remaining] an independent toy company," he says. At least a few shareholders may not agree. Two separate shareholder class actions, filed in December and January, allege that Grey took too long to tell them that 1993 would not be the record year he had forecast as recently as April. But several analysts and institutional shareholders who were not parties to the suits say Grey was forthright about Tyco's declining fortunes.

A takeover is far from certain, of course. In the fickle toy business, the biggest hits usually take everyone older than nine by surprise. Just ask Tyco's Magic 8 Ball, which still sells almost a million units a year, whether there are any company-saving hits in Tyco's toy chest: "Cannot predict now," it divulges solemnly, followed by: "Signs point to yes." Forgive the toy's corporate boosterism. Maybe Magic 8 Ball doesn't want to be acquired, either.

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