Last week, reports emerged that leading U.S. toymaker Hasbro (NASDAQ: HAS) has offered to purchase its close rival Mattel (NASDAQ: MAT). While Mattel plays hard to get, the cast analyzes the underlying rationale and potential benefits of a merger between these two toy titans, which between them boast a more than 30% share of the U.S. toy market. Check out the video below to follow this discussion from The Motley Fool's Industry Focus podcast.
A full transcript follows the video.
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This video was recorded on Nov. 14, 2017.
Vincent Shen: I hope you don't mind if we start this episode by returning to a discussion that Danny Vena and I had two weeks ago. On Halloween, we talked about the toy industry, how Toys R Us is thinking about its business with the bankruptcy generally in its rearview mirror, and also how Mattel and Hasbro are dealing with changing consumer trends and some of the successes and challenges that they're facing themselves.
We've seen previously in many industries that are struggling with lots of change or upheaval, consolidation becomes a pretty popular way of surviving or enjoying a little bit more growth and success. So, as of late last week, investors are reacting to the news that Hasbro has actually approached Mattel with a buyout offer. These are the No. 1 and No. 2 toy companies. Combined, they would have about one-third of the industry market share in the United States, with over $10 billion of revenue, and their portfolio would include very famous toy names like Barbie, American Girl, Fisher Price, Nerf, Monopoly, Transformers and dozens of other brands. We have a few minutes to talk about this news. Asit, what do you think?
Asit Sharma: I like this idea. If you were to go back to 2014, you would see the path of these two stocks cross. Since then, Mattel has lost 61% of its value, and Hasbro has gained 75%. Hasbro is obviously the much stronger player. It has operating margins of 15%-plus every year. Mattel's operating margins have dropped under 4%. Why is that? I think Hasbro has embraced more of an omnichannel strategy than Mattel has over the years. It's been quicker to embrace online sales. Mattel still has a heavy foot in the point-of-sale world. So, when we saw Toys R Us have this bankruptcy filing, Mattel was hit a lot harder than Hasbro, because Mattel can't manage its inventory quite as adeptly as Hasbro, and it relies more on the traditional retail channels. Having said that, it has awesome brands, Barbie, Fisher-Price, Hot Wheels. So, there's a lot of synergy between these two companies. And I think the stronger player, Hasbro, can really optimize operations for Mattel. And together, not to sound cliché, but we're just getting warmed up here, they will be stronger together. What do you think, Vince?
Shen: I think, despite the fact that some of the brands we mentioned on Mattel side, like Barbie, for example, have been seen declines for several years in terms of their sales, not seeing the growth that they want at all in some of those core names. At the same time, Hasbro has shown the adaptability that you mentioned, in terms of branching out a little bit, in terms of their strategy, and also some of these licensing deals that they've been involved with, with Disney and other popular titles in media, for example, have proven very lucrative for them. Also, for example, the maker of Star Wars toys, Hasbro. So, I think the combination definitely seems like a very appealing idea, especially for Mattel investors, to create an entity that can better compete in an otherwise pretty fragmented industry.
Combined, again, they would have about 30%, about a third, of market share in the U.S. Otherwise, in terms of this deal, the specific details that we have are pretty sparse. We know the deal discussions are in process, but there are still a lot of obstacles to something like this coming together. For example, the two companies would have to agree on a valuation and a buyout premium. And that's not necessarily going to be easy, since Mattel's stock was down 50% year-to-date before the news of these deal negotiations broke. Management will be trying to get the bid up from the multiyear lows where the stock is currently trading. And even then, if they do manage to come to an agreement, I think the regulatory picture is also not clear. The toy industry might be pretty fragmented, but I think it's always tough to sell the idea of combining the top two players, in any industry. Maybe the combination, the market share they would be able to claim, would be too much. There might be concessions in terms of spinning off certain businesses. We'll see. We'll check in on this deal as more details emerge.
Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool has a disclosure policy.