UBS: It’s About Time for a Mattel-Hasbro Merger – Investopedia

Following speculative reports regarding toy maker Hasbro Inc.’s (HAS) alleged interest in Mattel Inc. (MAT), UBS analysts say structural consolidation within the industry “may become relevant.”

Could the maker of Monopoly, My Little Pony and Nerf merge with the Barbie and Hot Wheels manufacturer? UBS analysts weigh in on a potential combination, indicating that they have “consistently been getting questions on the strategic rationale” of such a deal.

A Fragmented Toy Market

A group of UBS analyst led by Arpine Kocharyan indicate that the toy industry as a whole will consolidate over the next year or so.

“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,” wrote the UBS analysts.

Merger Could Save Mattel from Recent Plummet

UBS also highlighted Mattel’s recent decline, in which its stock plummeted nearly 18% on a Q4 miss. In the most recent quarter, the El Segundo, Calif.-based company’s 5% revenue dip year-over-year (YOY) reflected the firm’s difficulty in innovating to meet new consumer demands. Over the same period, Hasbro saw global sales jump 11% YOY as its shares spiked about 20% on the earnings beat.

UBS says investors are pricing in a dividend cut for shares of Mattel, trading at about 15 times 2018 estimated earnings per share (EPS), while Hasbro is trading around 19-20x.

Ultimately, the analysts forecast that if the Pawtucket, R.I.-based toy maker offered $33 per share for Mattel stock, representing a premium of about 30%, Mattel would save around $80 million in synergies over the first year, $240 million in the second and $400 million in the third. By 2019, the analysts say the deal could lift Hasbro’s EPS by 33%. (See also: Can Mattel Catch Up to Hasbro?)

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