Jakks Pacific Seen Raising Bid in Buyback-Poison Pill: Real M&A
Jakks Pacific Inc. (JAKK), the maker of Disney Fairies dolls and Pokemon cards, is betting share buybacks and a poison pill will force Oaktree Capital Management LP to boost the cheapest bid on record for a toy company.
After rejecting Oaktree’s September offer of $20 a share, Jakks fell as low as $13.36 in January as traders speculated a lower revenue forecast would compel Oaktree to reduce its bid, which already valued Jakks at a 48 percent discount to sales, according to data compiled by Bloomberg. This week, Jakks said it will buy back shares at $20 each, add two board members and meet with Oaktree, pushing the stock to $18.98 yesterday. That’s the closest Jakks has been to the offer price since December.
The repurchase is setting a new “floor” for takeover discussions, said Tullett Prebon Plc, as the Malibu, California- based company tries to prove that its toys, including Monsuno action figures based on a Japanese animated television show, are worth more than Oaktree’s proposal. With a shareholder rights plan adopted in March blocking an unwanted hostile takeover, GFI Group Inc. and Needham & Co. say the deal may reach at least $22 a share, a 37 percent premium to the stock price before the bid was first disclosed in September.
“Jakks is saying, ‘We’re a buyer at $20, not a seller,’” Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access, said in a telephone interview. “Management and the board are doing things right. Jakks put the ball back in Oaktree’s court. It’s up to Oaktree to come out and revise the offer.”
Joel Bennett, chief financial officer of Jakks, didn’t respond to a phone call. John Christiansen, a spokesman for Los Angeles-based Oaktree, declined to comment on whether the company is considering raising its offer for Jakks.
Today, shares of Jakks rose 4 cents to $19.02.
Founded in 1995, Jakks sells everything from Hello Kitty plush toys and princess costumes to Smurfs figurines and swimming pool toys. It licenses brands from Walt Disney Co., Warner Bros. and the Ultimate Fighting Championship mixed martial arts league, according to its website.
After Jakks’ board refused to engage in talks, Oaktree made public on Sept. 14 that it wanted to acquire the toymaker for $20 a share. The offer valued Jakks at about $387 million after subtracting net cash, or about 52 cents for every dollar of sales in the 12 months prior to the bid, data compiled by Bloomberg show. That was the cheapest among toy acquisitions of at least $100 million, which have a median multiple of 1.07 times revenue, the data show.
Jakks turned down the offer on Oct. 5, saying the buyout firm was trying to take advantage of adverse economic conditions to buy the company below its “intrinsic value.”
The shares tumbled to a 21-month low in January as analysts and traders speculated the reduction of Jakks’ 2011 sales forecast the prior month would leave it without a buyer or compel Oaktree to cut the bid. The toymaker’s revenue fell for a third straight year in 2011 as U.S. consumers cut back on spending and children favored video games over its stuffed animals and action figures.
After Jakks adopted a poison pill in March that capped investors at 10 percent to help fend off unwanted takeover attempts, shareholder Clinton Group Inc. sent a letter to the board asking it to review options and weigh Oaktree’s bid.
“It’s been kind of a saga,” Lobravico said. “You had an activist shareholder send a letter in mid-March all of a sudden asking them to run a sale process and to look at the Oaktree offer.”
Jakks agreed this week to meet with Oaktree and provide requested information. The company also said it will do a self- tender for $80 million of its stock for at least $20 a share and add two independent directors to its current six-member board. In turn, Clinton Group, which now owns a 4.9 percent stake, agreed to support this year’s incumbent board nominees.
“When a company like Jakks is doing a self-tender at $20, they’re saying that that’s not the ceiling, that’s the floor,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon, said in a phone interview. “It could behoove Oaktree -- if they’re really interested -- to say enough is enough, here’s a higher offer. And it could still make sense for both them and shareholders.”
Jakks shares closed yesterday at $18.98, only 5.1 percent below Oaktree’s offer. The company’s recent moves also prompted analysts to increase the average projection for Jakks shares in the next 12 months to $21.60 this week, the first time it has exceeded Oaktree’s offer since December, estimates compiled by Bloomberg show.
“There is less downside because of the self-tender, because of the obvious interest of these two parties and because the business is stabilizing,” Sean McGowan, an analyst for Needham in New York, said in a phone interview. “I’m not sure this will be an open-arms embracing type of discussion, but something’s going to happen.”
Joseph De Perio, a senior portfolio manager at Clinton Group, said Oaktree should pay more than $24 a share, based on an analysis of prior transactions and a leveraged buyout model.
“We trust that the newly augmented board will work in the best interest of shareholders to evaluate a firm proposal from Oaktree,” De Perio said in the statement. “Given their continued interest level today, prevailing market prices and the self-tender price of $20, I assume for the sake of their own time, that they are evaluating a transaction that would provide a clearing market price.”
Even if Oaktree boosts the offer, it may be not be enough to convince Jakks to sell, said Edward Woo, an Irvine, California-based analyst for Ascendiant Capital Group LLC.
“There might be a wide gap between what Jakks thinks they’re worth and what Oaktree is willing to pay,” Woo said in a phone interview. “My guess is what Jakks wants is something north of $25.”
It would be easier to argue that Jakks deserves a higher price if it owned the intellectual property behind more of its toys instead of having licensing deals, which eventually expire, Woo said.
Still, Jakks is boosting its share price by putting its cash to use with the buybacks. The company’s cash and short-term investments had risen to about $255 million as of March 31, or about 52 percent of its current $494 million market value.
Oaktree may now have to pay $22 a share to get Jakks’ board to agree to a deal, said Needham’s McGowan and Alfredo Scialabba, a New York-based special situations and risk arbitrage analyst at GFI Group. That’s 37 percent more than Jakks’ average price in the 20 days before Oaktree’s offer was made public last year.
“Oaktree is still in the process,” Scialabba said in a telephone interview. “Now they clearly have access to internal numbers. Based on those numbers they will be able to boost it a little.”