The Hypothetical Case For A Mattel-Hasbro Merger

UBS analyst Arpine Kocharyan said 2017-2018 could see a pickup in consolidation in the toy market, which remains fragmented.

The top 3 players – Mattel, Inc. MAT, Hasbro, Inc. HAS and LEGO Group -- make up about 50 percent of U.S. market, with the rest of 6-7 players at share of less than 5 percent 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,” Kocharyan wrote in a note.

With reports resurfacing of Hasbro's potential interest in Mattel, Kocharyan presents a case for the potential merger of the two toy makers.

UBS Model

Kocharyan estimates a takeout price of $33, representing a premium of at least 30 percent to Mattel’s current levels. The equity consideration of the potential transaction amounts to $11.352 billion after taking in to account the 343 million share count of Mattel.

The analyst also assumes net debt of about $1.457 billion and deal fees of $192 million, taking the enterprise value of the deal to $13 billion. Kocharyan expects the potential deal to be funded with 65.1 percent in equity, 30 percent in debt and 4.9 percent in cash.

Kocharyan models the potential deal to add $0.26 to Hasbro’s FY2017 EPS and $1.01 to FY2018 EPS, with cost synergies projected at $400 million.

On the financial front, the combined company could earn $5.18 a share on an adjusted basis for FY2017 and $6.28 a share for FY2018. Kocharyan’s model estimates the combined company revenue of $11.30 billion for FY2017 and $11.56 billion for FY2018.

Antitrust Concerns

However, the potential combination would invite antitrust concerns. But, Kocharyan noted that his model assumes how regulators slice and dice the traditional toy market, and impact on a third player's ability to get shelf-space at Wal-Mart Stores Inc WMT and Target Corporation TGT.

“We also note that top tier licenses (Disney/Marvel, DC Comic, Universal etc.), currently held by Mattel and Hasbro, likely include a change of control provision, whereby owner of IP can renegotiate the license if there is an effective change of control,” Kocharyan added.

See also:

The Most Valuable Toy Brands

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