Why Mattel Is Unlikely To Be A Takeover Target

D.A. Davidson said in a recent note it doubts Mattel, Inc. MAT could be a take-out candidate. The firm noted that the company's shares traded up 11 percent Monday on investor belief that it could be sold or broken up.

As such, the firm reiterated its Underperform rating on the shares of the company, with a 12-18-month price target of $12.

At the time of writing, Mattel shares were sliding 9.44 percent to $14.11 after rising over 11 percent the day before.

Analysts Linda Bolton Weiser and Daniel Stauder said Mattel, though having some valuable consumer products, is not an "IP powerhouse."

"We think Barbie and Hot Wheels would NOT be appealing to an entertainment or media conglomerate in the same way that Walt Disney Co DIS wanted Marvel and Lucasfilm," the analysts added.

D.A. Davidson thinks Mattel's high leverage, high seasonal working capital needs, cyclicality and bankruptcy outcome for private equity-owned Toys R Us make the company unappealing to financial buyers.

According to the firm, toy companies having the size and financial strength to be a potential strategic buyer number at just two: Lego and Hasbro, Inc. HAS. However, the firm noted that Lego was experiencing its first declines in many years.

Although Lego may want to diversify its single-category business, the firm said it has fewer deal structure options than Hasbro, given that it is a private company. The firm also noted that talks between Mattel and Hasbro in the past regarding a potential combination did not bring out anything tangible.

Given that Mattel does not have any non-strategic businesses and very few non-performing brands with any material value, the firm said it does not envision a break up of the company, leading to shareholder value creation. Instead, the firm said the company has one of the most-focused brand portfolios of any global consumer products company it has looked at.

The firm said the Street estimates for Mattel of 70 cents for 2018 and $1.03 for 2019 factor in a perfect turnaround and full realization of management's ambitious cost reduction plan.