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Hasbro Wants to Transform Mattel

By Danny Vena - Updated Nov 15, 2017 at 3:55PM

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Can the two toymakers do better together than apart?

Toymaker Mattel (MAT -2.48%) has been struggling for some time due to rising competition, children's changing play habits, and declining demand for its flagship Barbie brand. Its loss of the contract of produce toys for Walt Disney Co.'s Princess and Frozen lines was just the latest in a long line of missteps that gave competitor Hasbro (HAS -2.20%) the chance to take the title of top toy seller.

Mattel recently reported third-quarter financial results so dismal that it suspended its dividend and announced drastic cost-cutting to shore up its financial position. Now, it seems the company's fiercest rival may be joining the game.

The Wall Street Journal is reporting that Hasbro has made a bid for its ailing competitor, which had seen its market value fall by half this year alone. While terms of the offer have not been disclosed, Mattel had a market cap of about $5 billion before the report surfaced.

Barbie's Fashionista's line of dolls in a variety of body types, shapes, and ethnic origins.

Will Hasbro step in and save Mattel from its recent financial difficulties? Image source: Mattel.

Trouble in Toyland

The changing landscape of the toy industry claimed its latest victim when privately held big-box chain Toys 'R' Us filed for bankruptcy protection in September. Children have been increasingly drawn to electronic devices in favor of old-school toys, and while toymakers have tried to adapt to keep pace, overall sales have fallen.

The bankruptcy of Toys 'R' Us cast a shadow over the entire industry, but it hit Mattel particularly hard. The chain accounted for about 11% of Mattel's sales, and its loss as a retailer took a bite out of its already dwindling North American revenue, which fell 22% year over year.

A marriage of convenience?

Mattel and Hasbro have reportedly conducted merger talks on and off over the years, even as recently as late 2015. The two have complementary portfolios: Mattel has always been more focused on girl-centric lines, with its American Girl, Monster High, and Barbie offerings perennially high on the lists of most-wanted dolls. Hasbro, meanwhile was stronger in lines more popular with boys, such as Transformers, G.I. Joe, and Nerf.

Mattel's recent weak results and depressed share price have left it ripe for new takeover speculation.

Buyout chatter increased last month after analyst Gerrick Johnson of BMO Capital Markets suggested that investors might best be served by a takeover. "At this point, we think investors can start looking at other end games, including the possible sale of the company," Johnson wrote in a research note to clients. 

Mattel intends to cut $650 million in costs over the next two years, and at its investor day in June laid out a detailed blueprint as to how it planned to reinvigorate its flagging sales. The company wants to augment its most popular brands -- such as Thomas the Tank Engine, Fisher-Price, and Hot Wheels -- with more digital games, connected toys, and online content. Mattel also plans a bigger push into emerging markets.

Still just rumors

There are numerous caveats to rumors about a merger. The reports haven't been confirmed by either company, and it isn't yet clear whether Mattel is interested in such a deal, which would also have to pass muster with antitrust regulators.

Investors seemed bullish on the idea though, and Mattel stock climbed more than 20% on the news. Given the ongoing challenges facing the company, it's no wonder shareholders are excited about the potential combination.

Danny Vena owns shares of Hasbro, Mattel, and Walt Disney and has the following options: long January 2018 $80 calls on Walt Disney. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mattel, Inc. Stock Quote
Mattel, Inc.
$23.21 (-2.48%) $0.59
Hasbro, Inc. Stock Quote
Hasbro, Inc.
$80.61 (-2.20%) $-1.81

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