Dow Jones Newswires -- October 11, 1999
DJ BARRON'S ONLINE: Pros Say Mattel May Be In Play
By Vito J. Racanelli
Weekday Trader
NEW YORK (Dow Jones)--Ordinarily, fall is the happiest season at Mattel's El Segundo, Calif., headquarters. That's when the company's Barbie dolls, Hot Wheels cars and Fisher-Price toys fly out the doors as the holidays approach.
This year, however, it looks like Santa may pass El Segundo by.
One week ago, Mattel shocked investors with a warning that it would miss third quarter earnings estimates by 40% to 55%, thanks to a revenue shortfall at the Learning Co., a maker of educational and entertainment software, which Mattel acquired last December. It was the second time in less than a year Mattel has told analysts that it wouldn't be stuffing their stockings as much as they'd expected.
Retribution has been swift and severe: Last week's 30% freefall in the stock brought Mattel's market capitalization to around $5.3 billion, about 37% of its value at the March 1998 peak. And though the board still officially supports Chief Executive Jill Barad, she is under heavy pressure to sort out Learning Co.'s problems quickly or get the ax. As for Wall Street, it has essentially thrown in the towel on what was once the world's most successful toy maker.
Yet adversity sometimes leads to opportunity. Several money managers and analysts tell Barron's Online that Mattel's stock price has become so weak that it could be ripe for a takeover.
Several factors could make Mattel appetizing, particularly to a large entertainment company, they say. The stock trades at the lowest price-to-earnings (P/E) multiple in nearly a decade, and its lowest absolute market multiple ever-way too low, even given the latest Learning Co. debacle, these analysts say.
The company's most serious problems appear to be confined to Learning Co. And though Barbie's sales growth has slowed over the last year, she and Mattel's other well-known toys number among the best-loved global brands and continue to sell well.
Also, given the intense shareholder dissatisfaction, Mattel's embattled CEO is in no position to fight any serious bid. If one were to materialize, the price might be anywhere from 15 to 22, significantly higher than Monday's close of 12 5/8-but painfully lower than its all-time high of 46 9/16.
"Any time you see a company that goes down this much and still has some healthy businesses," it's a potential target, says Kevin Grant, an analyst at Harris Associates LP, manager of the Oakmark Fund, which he says still owns "a boatload" of Mattel shares.
Veteran toy analyst Sean McGowan of boutique brokerage investment bank Gerard Klauer Mattison ticks off all the buyout ingredients one by one: "The value has come down so much. The board has to be unhappy. There's management turmoil and shareholder unhappiness."
Plus, "you've got some strong global brands," says McGowan, who adds, "I've been going through my mental Rolodex to see who might be interested" in Mattel.
Of Mattel's $4.7 billion in 1998 sales, for example, Barbie and infant/preschool lines like Fisher Price each contributed over $1 billion. Learning Co., meanwhile, recorded $850 million in revenue last year. And Mattel noted last week that total orders for Barbie, Hot Wheels and Fisher Price products exceeded its fulfillment capacity by more than $100 million in the third quarter.
Excluding Learning Co., "Mattel is worth more than it's trading for," says Mark Hughes, a portfolio manager at Lafayette Investments, which doesn't own the stock. And if Learning Co. proves to be a bigger problem than is currently thought, "someone could [still] buy Mattel and jettison TLC," he asserts.
Who would be interested?
Not even archrival Hasbro can be ruled out, though overcoming antitrust problems could be a high hurdle. Tucker Anthony analyst Margaret Whitfield says it was "unthinkable" a few months ago, but now people are speculating that Mattel could be vulnerable to a bid from Hasbro - at which it made a run in early 1996.
But an outsider is more likely.
"Look to the entertainment world, " advises Merrill Lynch analyst Hayley Kissel. She points to Walt Disney Co., with its wide range of product tie-ins to Mattel, as well as the entertainment divisions of Sony and News Corp. as potential suitors for Mattel. Time-Warner and videogame maker Sega also come to mind, adds Morgan Stanley Dean Witter analyst Leah Stambler. Disney declined comment, while Japanese game maker Nintendo says it's not interested.
As it stands, Mattel stock trades at 9.5 times 2000 First Call consensus estimates of $1.32 a share, up from the estimated $1.00 a share this year. Long-term annual earnings growth is estimated at 15%. But there's little conviction that Mattel now will meet that projection. (By comparison, Hasbro sells at 13.8x First Call 2000 consensus estimates of $1.59 a share, on a projected 9% increase from this year's earnings estimate.)
"Even if you assigned TLC a value of zero and looked at what the rest of its businesses were putting out, the multiple is pretty low," says Grant, a vocal critic of Mattel's current management. Morgan Stanley's Stambler says Mattel stock is "ridiculously cheap" even with TLC, adding it would be worth 20 to 22 "to a strategic player." That would suggest a price tag of $8.4 billion to $9.2 billion.
Gerard Klauer's McGowan adds that the price is so low that Mattel could even entice a financial buyer or a leveraged buyout.
Of course, any possible takeover faces a couple of obstacles.
No one yet knows how big a black hole Learning Co. is, notes Erik Gustafson, a money manager for Stein Roe & Farnham, which held 3.8 million Mattel shares as of June 30, according to bigdough.com. The shares could fall even further if new problems are revealed, and Barad's management team has little credibility left-even on issues relating to the core business. A Mattel spokesman declines comment.
Of course, if Mattel somehow manages to clean up Learning Co. with no further damage, the shares should rise from these levels.
But if the stock stays where it is or sinks some more, Mattel itself may wind up as the favorite toy on some big player's holiday wish list.
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