The time could be right for a combination of toy makers Hasbro and Mattel.
Hasbro makes things like Monopoly, My Little Pony, and Nerf while Mattel makes stuff like Barbie and Hot Wheels.
That’s according to UBS analysts led by Arpine Kocharyan, who said they had “consistently been getting questions on the strategic rationale of a potential MAT+HAS combination.”
Bloomberg reported last year that the two had held merger talks, but the conversations didn’t go anywhere.
But there’s a couple of reasons to believe that a combination now would make sense, according to UBS.
First, there could be a broader consolidation in the toy market anyway. UBS said:
We have been of the view that ’17-’18 could see pickup in consolidation for what remains a fragmented toy market. Low barriers to entry & hit-driven nature of the industry have been primary drivers behind fragmentation. Top 3 players – Mattel, Hasbro & LEGO Group, make up <50% of U.S. market, with rest of 6-7 players at share of <5% each. Given 1) increasing dependence on entertainment-backed content which has been raising barriers to entry, and 2) importance of scale to move large inventory in a timely manner, we believe consolidation in the industry may become relevant.
Second, Mattel has been struggling lately as children are becoming less interested in Barbie/AmericanGirl dolls and more interested in electronics and brands like Star Wars. The company’s stock has struggled after a rough holiday season, and investors are pricing in a dividend cut. Mattel is currently trading at 15x 2018 estimated earnings per share, while Hasbro is trading at 19-20x.
Third, the UBS models project that if Hasbro pays a 30% premium for Mattel stock, a take out price of $ 33 a share, Mattel would save $ 80 million in synergies the first year, $ 240 million the second, and $ 400 million by the third. The result would be a 33% increase in Hasbro’s EPS by 2019.
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