FM Wealth Management News Letter
The price of Mattel Inc. share is up from its late
October low of $12.70 to trade as high as $18.8 as Hasbro as a possible takeover once again makes headlines.
On November 10th, a Wall Street Journal story talked about takeover speculation with BMO capital trying to salvage its buy rating, with a $30 target theey later lowered twice to $25, and then $20 at the end of October by saying,
Is Mattel really worth $10bn? Third quarter results would suggest no-way. Margins are deteriorating and Revenues continue to slide and the company even had to cut completely he dividend. But of course many brands are household names and certainly desirable. They are still selling well.
Hasbro could integrate the best selling brands and toys, cut out admin and other expenses and this would increase gross margins. Gross sales for 2016 were $6.07 billion, but Mattel only posted net income of $318 million. Hasbro would surely squeeze more profit.
The biggest upside to Hasbro would be the reduced competition. This would be especially helpful when bidding for franchises from the likes of Disney and would lift price pressures in stores.
We know that on another potential mega-merger AT&T is bracing for an antitrust lawsuit from the Justice Department that would attempt to block its pending acquisition of Time Warner (CNN’s parent company), on the grounds that it would harm consumers.
We are concerned that the same antitrust laws could block a Hasbro – Mattel deal. In fact they were mentioned in the Reuters article yesterday.
If we were to assume that Mattel is in big trouble and potentially go bankrupt without a takeover, we would think regulators would be more open to any deal, but we are not at that stage yet. It would be more likely that, Hasbro will bide its time and wait for it to happen.
We don’t see why Hasbro will be in any great rush to acquire a toy maker with falling sales when it is facing the same challenges (the digital age has changed children’s playing habits). It would be smarter for Hasbro to branch out into other spaces. They have already tried to buy U.S. movie studio and Entertainment Company Lions Gate Entertainment Corp. (NYSE:LGF.A) and DreamWorks Animation SKG Inc. (NASDAQ:DWA). We believe that the King (BATS:KING) Candy Crush franchise could have been a good acquisition, but Activision (NASDAQ:ATVI) beat them to it.
On the 27th October Prices opened 17% lower after a poor earnings report. This was low enough for a well-timed rumor to have an exaggerated effect because the takeover deal seems to be a logical move for Hasbro. This has happened before and no one really stopped to question the reliability of the rumors because they were run over by those rejoicing in the rally.With the move down, Mattel was getting so stretched it was set up to rally on one catalyst or another.
If we now look forward the rally will fade for new lows under $12.50, which is logical we are to believe that the takeover is being rebuffed, and the market gets a proper chance to price in the last earnings and the dividend cut. We would suggest that the price should once again recover from below $12.5. So remember that $10.40 was the 2009 low and looks a good spot to buy for the next rumor.
It is still too early for Hasbro to openly make an offer for Mattel, and anti-trust laws may hinder an approach. This of course won’t stop the rumors or the speculation. Whenever Mattel falls low enough, someone somewhere will put one and one together and conclude a takeover is coming. This time, however, one plus one equals three.
On November 10th, a Wall Street Journal story talked about takeover speculation with BMO capital trying to salvage its buy rating, with a $30 target theey later lowered twice to $25, and then $20 at the end of October by saying,
Is Mattel really worth $10bn? Third quarter results would suggest no-way. Margins are deteriorating and Revenues continue to slide and the company even had to cut completely he dividend. But of course many brands are household names and certainly desirable. They are still selling well.
Hasbro could integrate the best selling brands and toys, cut out admin and other expenses and this would increase gross margins. Gross sales for 2016 were $6.07 billion, but Mattel only posted net income of $318 million. Hasbro would surely squeeze more profit.
The biggest upside to Hasbro would be the reduced competition. This would be especially helpful when bidding for franchises from the likes of Disney and would lift price pressures in stores.
We know that on another potential mega-merger AT&T is bracing for an antitrust lawsuit from the Justice Department that would attempt to block its pending acquisition of Time Warner (CNN’s parent company), on the grounds that it would harm consumers.
We are concerned that the same antitrust laws could block a Hasbro – Mattel deal. In fact they were mentioned in the Reuters article yesterday.
If we were to assume that Mattel is in big trouble and potentially go bankrupt without a takeover, we would think regulators would be more open to any deal, but we are not at that stage yet. It would be more likely that, Hasbro will bide its time and wait for it to happen.
We don’t see why Hasbro will be in any great rush to acquire a toy maker with falling sales when it is facing the same challenges (the digital age has changed children’s playing habits). It would be smarter for Hasbro to branch out into other spaces. They have already tried to buy U.S. movie studio and Entertainment Company Lions Gate Entertainment Corp. (NYSE:LGF.A) and DreamWorks Animation SKG Inc. (NASDAQ:DWA). We believe that the King (BATS:KING) Candy Crush franchise could have been a good acquisition, but Activision (NASDAQ:ATVI) beat them to it.
On the 27th October Prices opened 17% lower after a poor earnings report. This was low enough for a well-timed rumor to have an exaggerated effect because the takeover deal seems to be a logical move for Hasbro. This has happened before and no one really stopped to question the reliability of the rumors because they were run over by those rejoicing in the rally.With the move down, Mattel was getting so stretched it was set up to rally on one catalyst or another.
If we now look forward the rally will fade for new lows under $12.50, which is logical we are to believe that the takeover is being rebuffed, and the market gets a proper chance to price in the last earnings and the dividend cut. We would suggest that the price should once again recover from below $12.5. So remember that $10.40 was the 2009 low and looks a good spot to buy for the next rumor.
It is still too early for Hasbro to openly make an offer for Mattel, and anti-trust laws may hinder an approach. This of course won’t stop the rumors or the speculation. Whenever Mattel falls low enough, someone somewhere will put one and one together and conclude a takeover is coming. This time, however, one plus one equals three.
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