Children's books were going to be the catalyst for change at toy maker RC2
RC2 isn't the only buyer on the market to have a merger collapse because of a dearth of credit. While we read about Bank of America
Mining company Xstrata just backed out of a $10 billion deal to buy Lonmin, and Apollo Capital Management tried to back out of buying Huntsman
The arid credit landscape comes at a particularly difficult moment for RC2. Revenue fell 4% in the toymaker's second quarter as it posted a $0.37-per-share loss. While the quarter is typically a slow one -- 60% of RC2's sales come in the second half of the year -- it also suggests that the next two quarters aren't going to be particularly robust. That's why a lot had been riding on the acquisition. With $112 million in annual sales last year and operating margins in the mid-teens, it was expected to be immediately accretive to earnings.
It was also going to be going up against some pretty weak comparables. Last year, sales had fallen as a result of two product recalls, which occurred at the same time as consumers began reining in their discretionary purchases. Plus, the Children's Publishing purchase would have been a nice fit with the company’s pre-school and toddler products.
RC2 will probably receive some benefits from the declines in prices we've seen in commodities and fuel costs, along with a strengthening of the dollar against many major currencies. The toy maker says it has not closed the book completely on making the acquisition, that it might revisit it if there's a thaw in the credit markets. Yet at 12 times expected earnings, that's putting it at a level comparable to Mattel
With the coming holidays not expected to bring much cheer to retailers, I wouldn't look for RC2 to write many new chapters on growth anytime soon.
Read chapter and verse with these related Foolish articles:
- RC2 tries to keep its head above water.
- Once upon a time, RC2 made money.
- Every day is Christmas for some toy makers.
