Mattel's stock rallies on news of acquisition offer as Hasbro may enter the fray

By Bill Peters

D.A. Davidson says Mattel 'fits the bill' as a private-equity takeover target thanks to its low valuation and high free cash flow

Shares of Mattel Inc. jumped on Monday on a report saying that the private-equity firm L Catterton had come forward with an offer to acquire the toy maker - a move one analyst said wasn't surprising given a long slump in the company's stock price.

The news was reported by Reuters, which said that rival Hasbro Inc. knew about the move by L Catterton - an investment firm that the luxury behemoth LVMH (FR:MC) (LVMUY) helped create - and was weighing whether to make its own offer, potentially marking the latest attempt at a tie-up between the two companies.

Reuters said that there was "no certainty L Catterton's approach will push Mattel into exploring a sale." But it said the acquisition offer from the private-equity firm could prompt others to make their own offers.

A Mattel (MAT) spokesperson, in a statement, said: "We do not comment on speculation. We are very confident in Mattel's strategy and our ability to create long-term shareholder value as a standalone company."

Hasbro (HAS) and L Catterton did not immediately respond to requests for comment.

Shares of Mattel climbed 17% on Monday, and were trading at around $19. The sprint higher, which comes a day before Mattel reports second-quarter results, helped wipe away the stock's decline so far this year. Hasbro's stock rose 1.6% to around $60.

Any acquisition bid would follow two years of weaker demand for toys. Enthusiasm for toys has faded after pandemic restrictions that kept people at home were lifted, and after the spike in prices beginning in 2022 forced many shoppers to spend more on basic needs. Both Mattel and Hasbro have focused more on leveraging their intellectual property to help make shows and films based on their classic toys, while Hasbro has leaned on its Magic: The Gathering and Dungeons & Dragons games to steady its sales.

D.A. Davidson analyst Linda Bolton Weiser, in a research note on Monday, said interest in a takeover was "not too surprising." But she said any potential deal wouldn't be without risks.

Mattel, she said, "fits the bill as a [private-equity] takeover target in that it generates high free cash flow and has a low valuation. One negative is the high seasonality of the business and working capital needs, which a PE firm might not love."

She also said that growth in the toy industry could continue its uninspiring trajectory, if consumer confidence continues to wane.

Previous efforts by the two rivals to combine - in the prior decade and in the 1990s - failed to materialize. However, Weiser on Monday said Hasbro's stock valuation over Mattel's was "perhaps the highest we have seen in our years covering the two stocks."

She added: "With Hasbro's leveraged balance sheet, it would have to use stock in a proposed takeover of [Mattel]. One benefit of a combined company would be that [Mattel's] high free cash flow could help fund investment behind [Hasbro's] gaming business."

But she also said that if Mattel couldn't arrange a sale, it might have to punch up its storyline for Wall Street.

"If [Mattel] does not sell itself, it needs to construct a more appealing narrative for investors, to increase the company's valuation," she said. "One problem with MAT is that its financial disclosures are not making the most valuable elements of the business (revenue streams related to gaming, high-margin licensing royalties) transparent to investors."

-Bill Peters

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07-22-24 1714ET

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