Is a Hasbro-Mattel Tie-Up Inevitable This Time?
Such speculation has fizzled in the past, and a similar fate could occur this go-round.
The Wall Street Journal recently published an article detailing an approach that narrow-moat
This isn’t the first time the two businesses have been a subject of merger rumors (the last time such speculation was stirred was 2016), but it is the first time Hasbro’s market capitalization has been nearly double Mattel’s, placing it in a position to acquire a significantly depressed business. Historically, such a tie-up would either have been viewed as a merger of equals, or Mattel would have been the suitor, which would be the case had discussions been taking place a decade ago.
We don’t plan any change to our respective fair value estimates for Mattel and Hasbro, and we caution investors that such speculation has fizzled in the past, and a similar fate could occur this go-round.
Hasbro remains a diligent capital allocator, and has let prior discussions dissipate due to unfavorable terms. Media outlets speculated such issues occurred in the summer of 2017 surrounding a potential tie-up with LionsGate Films. It was also believed that the company had been in discussions with DreamWorks Animation in 2014, which also failed to result in a successful corporate marriage. For Mattel, we remain concerned that the new management team may not be keen on relinquishing a business at such depressed levels, when normalized earnings power is significantly higher than current levels, in our opinion. For reference, Mattel is forecast to deliver 5% operating margins in 2017, down from 18% in just 2013. Operating margins are slated to rise back to more than 15% in 2022 in our model, which would allow Hasbro to capture the business at a very undervalued price; even at $18, Mattel stakeholders could still be hesitant to agree to a sale.
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