Hasbro (HAS) is not playing around. One of the largest companies in the toy industry is looking to acquire major competitor Mattel (MAT) according to a report from
The Wall Street Journal
. Mattel reportedly rejected Hasbro’s first offer, but I could still see more effort to make a deal happen.
This is not the first time Hasbro and Mattel have considered a combination. The two sides have failed to come to terms in the past, but conditions today make a deal more appealing than ever. The toy industry has been thrown into a state of uncertainty over the past few years for a number of reasons, including:
A Hasbro/Mattel merger could address some of these concerns and create significant profit growth opportunities through cross-licensing, increased bargaining power, and cost control. Hasbro already has a place on my Focus List of high-conviction long ideas, and a successful merger with Mattel could make it an even better buy – assuming the price does not go to high.
Good Time to Buy Low on Mattel
Historically, Hasbro and Mattel have gone toe-to-toe for the status as America’s most profitable toymaker. As Figure 1 shows, this pattern shifted in 2014. Mattel’s return on invested capital (ROIC) took a sharp fall and has continued its decline.
Figure 1: HAS vs. MAT ROIC Since 1998
New Constructs, LLC
Hasbro Vs. Mattel: ROIC Since 1998
Over the past year, Hasbro also surpassed Mattel in terms of annual revenue. Key Mattel brands such as Barbie, Fisher-Price, and American Girl have experienced revenue declines ranging from 6% to 30%. At the same time, Hasbro continues to grow revenue in the mid-to-high single digits.
This divergence creates an opportunity for an acquisition at an attractive price point as Mattel’s stock price (down 59% since 2014) has followed it’s ROIC down. In the past, both Hasbro and Mattel have resisted acquisition offers at low ebbs in their profitability as they bet on cyclical trends lifting their performance. After three years of underperformance during an upswing for the industry, Mattel may no longer have the confidence in its ability to turn things around.
