Hasbro-Mattel merger could reshape the toy industry and affect licensing deals

It’s holiday shopping season, so let’s talk toys — from an investment perspective, of course. Toy retail sales for 2017 are expected to register a growth rate of 3.4% over last year. Additionally, online and off-store sales, which are included in the overall figure, are expected to grow 7-10% year-over-year.

While the toy space is potentially very lucrative, being a $100 billion industry worldwide, it is also challenging. Seasonality lives here in the extreme.

Technological change is accelerating. Licensing accounts for over 30% of all sales and is driven by big-screen movies watched by wayward kids. Sales are often in established markets with tiny population growth, although emerging markets are becoming increasingly important.

A major player in the toy industry that has always been a leader is Mattel (MAT). Unfortunately, today this is not the case. While Mattel owns several established core brands, including Barbie, Fisher-Price, and American Girl, the company has fallen on hard times lately. The situation escalated with the declaration of bankruptcy of Toys-R-Us.

Additionally, Mattel is still trying to figure out how to fill the crater left in its income statement since Disney transferred its Princesses license to Hasbro in 2016.

Barbie received a bounce after Mattel introduced new body types and looks, but it wasn’t sustainable. American Girl has tried to shake things up with new offerings aimed at young girls with limited success. Mattel refers to dolls, along with Fisher-Price, Thomas & Friends, and Hot Wheels, as its power brands, though they seemed to have lost power.

Then there’s Hasbro’s unsolicited offer to acquire Mattel. Hasbro is currently worth around $11 billion, while Mattel is worth around $5 billion. The merger would put Barbie, Transformers, Nerf and Hot Wheels under one roof, not to mention licensing for DC and Marvel, creating a truly dominant player in the market.

Mattel shares are down about 47% this year, due to slowing demand for Barbie. Meanwhile, Hasbro shares are up more than 23% since January, in part due to the company’s grip on the “Star Wars” toy franchise.

If they merged, the two companies could control up to 34% of the toy market in the United States. In fact, the two companies would likely control every major toy brand except The Lego Group.

Last year, Hasbro fought over the licensing rights to Disney’s Star Wars franchise from Mattel, in addition to snapping up the rights to the lucrative Disney Princess dolls. Still, the prospect of Hasbro buying Mattel is likely to alarm licensors like Disney.

Mattel informed Hasbro that its unsolicited proposal undervalues ​​the company and does not give sufficient consideration to the possibility of regulators rejecting the deal due to antitrust concerns.

In my view, a proposed merger wouldn’t upset the government, especially considering that new market entrants like Chinese robot maker UBTech Robotics make even a combined Hasbro-Mattel entity less daunting.

UBTech makes humanoid robots such as the $300 Star Wars First Order Stormtrooper robot, which was developed in partnership with Disney.

Finally, Margo Georgiadis, CEO of Mattel, is new to the role. She was hired in January of this year. It wouldn’t do anything for her resume if the former Google executive left prematurely without showing herself able to turn Mattel around. Yet she and several other new Mattel executives know little or nothing about the toy industry.

So it wouldn’t be surprising if she tried to persuade Mattel’s board of directors to deny a sale to Hasbro or any other company. Additionally, the board would likely show some disdain for a deal at a time when Mattel is, in its view, undervalued. Meanwhile, time is on Hasbro’s side. And he could become a white knight if Mattel’s fortunes sink further.

About Lola C. Chapman

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