It's no secret that toymaker Hasbro (NASDAQ: HAS) has been on the hunt for a company to buy, and now after Mattel's (NASDAQ: MAT) disastrous third-quarter earnings report, it may have the perfect target.
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Of course, the two toymakers have explored merger opportunities in the past, but were never able to reach an agreement, so let's look at the top three reasons why this time they might make a go of it.
1. Mattel is in serious trouble.
The owner of Barbie, American Girls, and Monster High was already in financial straits and was trying to engineer a turnaround, but the bankruptcy of Toys R Us, which represents about 11% of Mattel's revenue, derailed the effort. Even much stronger Hasbro said the bankruptcy would hurt holiday sales, and its performance as it accounts for 9% of total revenues, second only to Wal-Mart in importance.
Yet beyond the retailer's failure, Mattel's sales were down 14% globally on a constant currency basis, causing it to announce a cost-cutting program that would see it shrink expenses by $650 million over two years as it seeks to right-size its business. Worse, from an investment point of view anyway, it suspended its dividend payment.
Companies are typically loath to cut their dividends, let alone suspend them, because of what it signals to the market, yet Mattel investors should have seen it coming. The toymaker's dividend has been classified as a non-dividend for years, meaning because of its abhorrent financial condition Mattel didn't have sufficient profits to actually pay a dividend. As a result, the payout was really a return of capital. That can only go on for so long before a company has to admit it can't afford to pay it anymore, which is what Mattel has finally done.
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2. Hasbro has been on the prowl for a target.
Over the years, Hasbro has been looking for that transformational deal to take it to the next level. On several occasions, that target has been rumored to be Mattel. Yet the most serious effort Hasbro made recently was for movie studio Lions Gate Entertainment (NYSE: LGF-A)(NYSE: LGF-B), but the potential for that deal ended up falling apart reportedly because of price, similar to its failed attempt at acquiring DreamWorks Animation in 2014.
That, of course, suggests Hasbro wants to go to Hollywood, not the nearest toy store, for a partner, but there aren't many movie studios available in the toymaker's wheelhouse or price range. A severely discounted Mattel, however, is a different matter.
Even as Mattel's stock jumps on potential buyout speculation, the toymaker has still lost half its value over the past year, and with a market cap of $5.9 billion, it's now valued at half of Hasbro, which trades at $11.8 billion.
3. The two toymakers are really complementary.
While a movie studio makes a lot of sense for Hasbro because of its ambitions to be another Marvel Entertainment and monetize its vast portfolio of games, Mattel would really make the perfect partner. The two are certainly competitors, but they would also fill holes in their respective toyboxes.
Where Hasbro's operations tilt in favor of the boys' market with properties like Star Wars, Transformers, and Nerf that helped generate almost $1.9 billion in sales last year, Mattel, with the iconic Barbie doll line, as well as American Girl and Monster High, is strongest in girls. Hasbro did realize $1.2 billion girls' toy sales in 2016, before it did away with identifying sales by gender.
A pairing would also net them significant savings in terms of not having to bid against each other for rights to make and market toys, such as when Disney (NYSE: DIS) stripped Mattel of the right to make and market its Frozen and princess line of dolls and gave it to Hasbro. It would also give Hasbro some huge names to make into movies, like Barbie and any number of girls from the American Girl series. (Or boys, for that matter, since it introduced the Logan Everett character earlier this year.) They'd also work well for Hasbro's TV studio ventures.
Should investors bet on a merger?
The silver lining to Mattel's disastrous earnings report is that it makes the toymaker more attractive than it's ever been, from a buyer's standpoint anyway. And if it was Mattel management that was previously taking a hardline stance against a deal -- the toymaker did start off the year installing a new CEO grabbed from Google -- it's hard to make the argument it is fully capable of going it alone. This quarter's earnings show that may no longer be a viable option.
Hasbro's own stock is down nearly 20% from recent highs, and while there are also a number of arguments against the two merging, it may finally be the right time for investors to bet Hasbro will buy Mattel.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, and Walt Disney. The Motley Fool has a disclosure policy.