MATTEL INC.’S ACQUISITION OF MEGA BRANDS INC · MATTEL INC.ACQUIRES MEGA BRANDS INC. 4 | Page...
Transcript of MATTEL INC.’S ACQUISITION OF MEGA BRANDS INC · MATTEL INC.ACQUIRES MEGA BRANDS INC. 4 | Page...
MergersandAcquisitions–SGMT6050
MATTELINC.’SACQUISITIONOFMEGABRANDSINC.AnAnalysis
PreparedFor:
DavidConklin
PreparedBy:
CC
SN
VT
BorisFucic
July8,2014.
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CONTENTSMattelInc.’sAcquisitionofMEGABrandsInc................................................................................1Mattel.........................................................................................................................................4
BusinessStrategy...................................................................................................................6
Mattel:Strengths–Weaknesses–Opportunities–Threats.................................................6
MEGABrands.............................................................................................................................8
BusinessStrategy...................................................................................................................9
MEGABrands:Strengths–Weaknesses–Opportunities–Threats......................................9
IndustryAnalysis-ToyIndustry...............................................................................................12
AlternativestotheMerger.......................................................................................................13
TheDeal...................................................................................................................................15
ConstructionToysCategory.................................................................................................16
Non-TraditionalToys............................................................................................................16
LicensingRelationships........................................................................................................17
MEGABrandstoLeverageMattelScale...............................................................................17
ProductioninNorthAmerica...............................................................................................18
PotentialObstaclestotheAcquisition.................................................................................18
Valuation..............................................................................................................................19
SharePrice............................................................................................................................21
CriticalMilestones................................................................................................................22
RisksandRockyPlaces.............................................................................................................23
IntegrationAptitude.............................................................................................................23
IndustryConsolidation.........................................................................................................23
SustainabilityinToyManufacturing.....................................................................................23
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IntegrationIssues.................................................................................................................24
Appendices...................................................................................................................................25Appendix1:Porter’sValueChain.............................................................................................25
PrimaryActivities.................................................................................................................25
SupportActivities.................................................................................................................26
Appendix2:SWOTStrategiesMattel.......................................................................................28
Appendix3:SWOTStrategiesMEGABrands............................................................................29
Appendix4:FiveForcesAnalysis..............................................................................................30
BargainingPowerofSuppliers(MEDIUM)...........................................................................30
BargainingPowerofCustomers(MEDIUM).........................................................................31
ThreatofNewEntrants(LOW).............................................................................................32
ThreatofSubstitutes(MEDIUM->Growing).......................................................................33
ExistingCompetitiveRivalry(MEDIUM)...............................................................................35
Appendix5:PESTLEAnalysisoftheToyIndustry.....................................................................37
Appendix6:ComparableCompanyAnalysis............................................................................40
Appendix7:DiscountedCashFlowMethod............................................................................41
Appendix8:MEGABrandsWACC............................................................................................42
Appendix9:PotentialValueofSynergies................................................................................42
Appendix10:StockPerformance.............................................................................................43
Bibliography.................................................................................................................................44
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OnFebruary28th,2014,MattelannouncedafriendlyacquisitionofMEGABrands,adealwhich
wascompletedonApril30th,2014.MEGABrandsshareholdersreceived$17.75CDNpershare
incash,equivalenttoa32%premiumtotheweightedaveragestockpriceinthemonthleading
tothemerger.Thetransactionrepresentedatotalvalueof$460millionUS,includingthedebt
ofMEGABrandstobeassumedorrepaidbyMattel.(CanadianPlasticsJournal,2014).
MEGA Brands acquisition was the best alternative for Mattel to advance its global growth
strategy of building upon its world class portfolio of brands. The acquisition will create
significantgrowthopportunitiesforMattelasitwillallowthecompanytoexpandintotwoof
the fastest-growing toy categories: constructionbuilding sets andarts& crafts.MegaBrands
givesMattelthemanufacturinganddesignknow-howintheconstruction-toycategorytobuild
asolidplatformtocompeteagainstLEGOandprotectitsNo.1positioninthemarket.
Furthermore, theacquisitionwill unlockanumberof synergiesbetween the two companies.
MattelwillbeabletocapitalizeonexistingMEGABrandslicensesandbroadenitsrelationship
with entertainment partners. Through the acquisition, Mattel will also have a tremendous
opportunitytoreturnsomekeymanufacturingbacktoNorthAmericaandmitigatesomeofthe
risk associatedwithproduction inChina. Themerged company could also see an increase in
efficienciesintheirdistributionandpurchasingcapabilities.
Notsurprisingly,atotalof99.96percentofMegaBrandsshareholdersapprovedthedeal,and
both companies’ share price increased after the official announcement, reflecting market
confidenceonthesignificantvaluethisacquisitionwillbringforMattelintheupcomingfuture.
MATTELMatteldesigns,manufacturersandmarketsabroadvarietyof toyproductsworldwidewhich
aresoldtoretailers,distributorsanddirectlytoconsumers(Mattel,2013).In2012,Mattelwas
thelargesttoymanufacturerintheworldfocusingonthetraditionaltoysandgamescategories
(Euromonitor,2013).
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Mattel sells their products in 150 countries and controls 17% of the US market. Its biggest
competitorsareHasbroandLego.Hasbro’sexpertiseisintheactionfigures,puzzlesandother
educational games. They aremostly known for games such asMonopoly and Transformers.
PartofHasbro’sstrategy istoexpand intothedigitalspaceworldandcompeteagainstother
computerorvideogameproducers.Legoontheotherhand, istheleader intheconstruction
setscategorymostlyknownforLegoBricksthatappealtoallagegroupsanditsstrategyisto
expandintoemergingmarkets.Legocurrentlycontrols75%oftheUSmarket.
Mattel’s product portfolio includes well-known brands such as, Barbie, Hot Wheels, Fisher
Price,DisneyCars,andMattyCollector.
Mattel has sales and marketing offices and facilities in 36 countries, its manufacturing
operations are located mainly in China but the company also operates plants in India,
Indonesia,Italy,Malaysia,MexicoandThailand.Thevarietyoflocationshelpsthecompanyto
preventriskfromanycountry’spotentialinternalproblems(Euromonitor,2013).
Additionally,inordertofurtherreducecostsandrisk,Mattelusescompany-ownedfacilitiesfor
theproductionofmostofitscoreproductsandthird-partymanufacturersfortheproductionof
other non-core brands. Approximately half ofMattel's products aremanufactured in one of
nineowned factories: four inChina, two inMexico andoneeach inMalaysia, Indonesia and
Thailand.Theother50%oftheirproductsareproducedbyvendorspredominantly located in
SouthernChina(Euromonitor,2013).PleaserefertoAppendix1 foradetailedanalysisof the
activitiesacrossthevaluechain.
Matteloutlinedthefollowinghigh-levelobjectivesintheirmostrecentannualreportfor2013:
Mattel’svisionis“creatingthefutureofplay”.Mattel’sobjectivesare:
• Togrowitsshareinthemarketplace,
• Continuetoimproveitsoperatingmargins,and
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• Createlong-termstockholdervalue”(Mattel,2013)
BUSINESSSTRATEGYMattel also outlined the following strategies that will help them achieve their long-term
objectives:
• GlobalGrowthStrategy:“todeliverconsistentgrowthbycontinuingthemomentumin
its core brands, optimizing entertainment partnerships, building new franchises, and
workingtoexpandandleverageitsinternationalfootprint.”(Mattel,2013)
• “Optimize operating margins through sustaining gross margins within the low-to-mid
50%rangeinthenear-term,above50%inthelong-term,anddeliveringoncostsavings
initiatives.”(Mattel,2013)
• Cash Flow and Value Enhancing: “Continue its disciplined, opportunistic, and value
enhancingdeployment.”(Mattel,2013)
MATTEL:STRENGTHS–WEAKNESSES–OPPORTUNITIES–THREATS
Strengths
Mattelgainsacompetitiveadvantagethroughitsglobalbrandawarenessandthemanyiconic
brands within its product portfolio. Moreover, Mattel also benefits from its licensing
agreementswithDisneythatallowsthemtouseDisneycharactersfortheirrecognitionvalue.
Additionally, theirmainmanufacturing facilities are located inmajor areas of growth,which
works toallowsMattel theability toenter thesenewmarkets relativelyeasily.Mattel isalso
oneofthetopretailersintheindustrywhichallowsthemtoutilizetheireconomiesofscaleand
enables them to utilize their collaborative powerswith their competitors tomaintain prices,
andnegotiatelowercostsfromsuppliers.
Weaknesses
In comparison to its competitors,Mattel doesnot have a focusoneducational, eco-friendly,
andtechnology-basedentertainmentproducts.Basedontheirexistingstrategy,itappearsthat
there is amajor gapbetweenwhatMattel is capableofproducingandwhat their long-term
visionistargetedat.Thisisinpartduetounderutilizationofitsintellectualpropertyresources.
Furthermore, over the past several yearsMattel has implemented a Global Cost Leadership
program, which focuses on cost savings through optimizations in their value chain. This
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initiative has placed them at a higher risk of sacrificing product quality and damaging their
brandas ithasfocusedoncontrollingcostsasopposedtodrivingproductsafetyorrenewing
consumerpreferences.
Opportunities
Dueto itsbrandpowerandnamerecognition,Mattel isable to formstrongpartnerships for
entering lifestyle, entertainment, clothing, gaming markets, and catering to a wider
demographicintermsofage.Mattelcanalsoleverageitsglobalpresencetomaximizeearnings,
andhedgeforeignexchange,political,orsocio-economicrisks.
Threats
Consumers’disposableincomehasfallensignificantlyinrecentyearsleadinganalyststopredict
growth in low-end or alternative products. Mattel’s costs are also likely to increase due to
complianceandcross-culturalmarketingstrategiesasitcontinuestoexpandglobally.
StrengthsandOpportunitiesStrategies
• Mattelhasastrong financialpositionwhichallowsthemtoenter theelectronicgame
marketeitherthroughanacquisitionororganically,
• Mattelcanleverageexistingbrandsandextendintoothersub-brandsinareassuchas
entertainment,clothing,
• Utilize itsglobalsupplyandmanufacturingbasetomitigateriskofcurrencyexchange,
politicalandsocio-economicrisks,
• Mattelcanextendintootherproductlinesbyanacquisitionand/orlicensing.
StrengthsandThreatsStrategies
• Utilizeassetstoexpandintoantherproductlinestobetterpositionagainstcompetitors
(i.e.electronicgaming),
• Imposestringentqualitycontrolstandardsonmanufacturingsuppliers,
• Leverageforeignearningstohedgeagainstcurrencyfluctuations.
WeaknessandOpportunitiesStrategies
• Continuetodevelopproductstolimitexposuretothird-partycontent,
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• Leverage to enter into new market segments, such as lifestyle, entertainment,
constructionsettoys,
• Developproductstargetedatolderagegroupstoexpandmarketpresence.
WeaknessandThreatsStrategies
• Mattelmaylicenseitsintellectualpropertytoothersforfastermarketpenetration,
• Entergamingsegmenttargetedat18–35yearolds,
• Acquire online gaming/electronic entertainment company to reduce dependency on
manufacturing.
PleaserefertoAppendix2forfurtherinformation.
MEGABRANDSMEGA Brands is a Montréal Based organization that specializes in toy design and
manufacturing.Thecompanyiswell-knownforconstructionsettoysandisrecognizedfortop-
of-the-linemanufacturingpractices.Itstwomainlinesofproductsincludechildren’stoysand
stationary products. The company has manufacturing facilities in over 17 countries with a
product presence in over 100 internationalmarkets. Its toys segment includesMEGA BLOKS
andMEGA PUZZLESwhile its stationary& activities segment is comprised of brands such as
ROSEART,BOARDDUDES,andWRITEDUDES.
Thecompany’sfocus isonquality,price,playexperience,marketinganddistribution,andthe
acquisitionofretailshelfspace.Itcreatesoperationalefficiencybymanagingitssupplychainto
createanoptimalbalancebetweenin-houseandthird-partymanufacturing.Itaimstoinvest3-
4%ofnet sales in researchanddevelopmentas innovation is a key growthdriver in the toy
industry. Currently, North America accounts for 70% of the company’s sales although the
companycontinuestoexpanditsinternationalpresence(MEGABrandsInc.,2014).Itsmission
isto“nurturecreativityineverychildandeveryfamily”(MEGABrandsInc.,2012)
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BUSINESSSTRATEGYThestrategiesofMEGABrandsare(MEGABrandsInc.,2014):
• Develop innovative products based on proprietary content and licensing agreements
withpopularbrands.
• Manufactureandsourcehighqualityproductsonacompetitivebasis.
• Marketproductstoleadingretailersandconsumersworldwide.
MEGABRANDS:STRENGTHS–WEAKNESSES–OPPORTUNITIES–THREATS
Strengths
MEGA Brands has a relatively strong brand presence in western markets. Its strong
relationshipswith companies such as CartoonNetwork, Nickelodeon, and Viacom Consumer
ProductsallowsittosecureaccesstoproductseriessuchasGeneratorRex,Doratheexplorer
andGo,Diego,Go!ItalsohasalicensingpactwithMarvelforSpiderman,theHulk,Bladeand
X-Men(Hoovers,2013).
MEGABrandshasasignificantmarketshare intheCanadianmarket,accountingfor60.2%of
Toy,Doll&GameManufacturingsegmentof theCanadianmarket (Haider,Toy,Doll&Game
ManufacturinginCanada,2014).Ithasmanufacturingoperationsacrosstheworld,buthasalso
recentlymade an effort to on-shoremolding operations (Stephen, 2013). The company also
owns a portfolio of brands that can easily be expanded into other parts of theworld, other
classes of product and other non-toy areas. Its diversified productmix includes construction
toys, puzzles, stationery and activity related products such as arts and crafts tools (RoseArt
Group),presentationboards,andwritinginstruments(Stephen,2013).Thecompanyalsotakes
advantage of technologies such as 3D design to create unique products and help facilitate
around-the-clock design (Sensable 3D Design, 2010). Having a flexible and fast design team
wouldallowthecompanytocapitalizeonchanges inconsumerdemand,akeysuccessfactor
fortheindustry(Haider,2014).
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MEGABrandsalsohashadstrongperformancerelativetoindustrypeers,havingoutperformed
Mattel and Hasbro for five straight quarters leading into the first quarter of 2013 (Stephen,
2013).
Weaknesses
MEGA Brands has experienced extremely volatile performance in the last 5 years of its
operations. It also had to deal with losses due to product recalls relating to its Magnetix
products, which impacted its brand reputation (Infomart, 2014). The company’s geographic
diversification is heavily concentrated in North America, mostly in Canada. Its operations in
Europeandotherareasoftheworldarejuststartingtotakehold.(Hoovers)
Opportunities
MEGABrands iskeyplayer intheconstructionsettoysegmentoneofthefewtraditionaltoy
segments that is growingyear-over-year. Thispresents the companywith theopportunity to
capitalizeontheirpresenceinthismarketandcontinuetoincreasetheirmarketshare.MEGA
Brandspossessestherightstomanufactureandsellnumeroustitlesthatgobeyondthecore
children’smarket(Haider,Toy,Doll&GameManufacturinginCanada,2014). Thisprovidesa
uniqueopportunitytoMEGABrandsastheagerangewithinwhichitcompetesisbroaderthan
most other toy manufacturers. Complying with government regulations is critical in this
industryandbecomingincreasinglycomplex.Itisexpectedthatlargercompanieswillbemore
adeptatmaneuveringthroughthecomplexitiesoftheregulatoryframework(Haider,Toy,Doll
& Game Manufacturing in Canada, 2014). Being a well-established company with great
governmentrelationsallowsMEGABrandsmoreopportunitiesforgrowthandexpansionthan
moretraditionalsmallerorganizations.
Threats
Thecompanycompetesinaglobalandheavilyconcentratedindustrywithequallyhighlevelsof
competition. This is also reflected in the fact that retailers have a tremendous amount of
strength to dictate elements such as delivery times and have a significant control on shelf
space. The industry participants are heavily reliant on export activity and are subject to
economic conditions. Industry drivers include the Consumer Confidence Index, consumer
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spending, per capita disposable income, demand from hobby and toy stores, exchange rate
fluctuations, and leisure time (Haider, Toy, Doll & Game Manufacturing in Canada, 2014).
Industryrevenuehasdroppedsignificantlysince2006buthasstartedtorecoverinrecentyears
(Haider, Toy, Doll & Game Manufacturing in Canada, 2014). The industry is expected to
continuetohavedifficultieswithgrowthoverthecomingyears.Itiscommonlyexpectedthat
toyswillcontinuetobecomemoreandmoresegmentedwithrevenuegrowthbecomingslower
thantheremainderoftheeconomy(Haider,Toy,Doll&GameManufacturinginCanada,2014).
StrengthsandOpportunitiesStrategies
• MEGA Brands can utilize its international presence and brand awareness to increase
marketingandfurtherexpanditsinternationalfootprint,
• The use of new technology such as 3D design can allow the company to create
innovativeproductsthatcangobeyondthecorechildren’smarket,
• Stronglicensingagreementsandrelationshipswithcompaniescanbeexpandedtobring
inadditionaltitles.
StrengthsandThreatsStrategies
• The slow growth in the toy industry means innovation is vital. The company should
increaseitsinvestmentinresearchanddevelopmenttocontinuedevelopingproprietary
content,
• Useglobalsupplychaintominimizecostsandcreatedistributionefficiency
WeaknessandOpportunitiesStrategies
• Investinginvirtualtoyshelpsfurtherdiversifyproductsandcatertodemand,
• Developproductstargetedatolderagegroupstoexpandmarketpresence.
WeaknessandThreatsStrategies
• Imposestringentqualitycontrolstandardsonmanufacturingsuppliers,
• Optimized supply chain and proprietary products delivered on time can help obtain
preferredshelfspacewithretailers.
PleaserefertoAppendix3forfurtherinformation
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INDUSTRYANALYSIS-TOYINDUSTRY
A PESTLE analysis was utilized to identify relevant trends in the Toy Industry over the next
severalyears.PleaserefertoAppendix2forfurtherinformation.
EconomicFactors
Emergingmarkets’economicdevelopmentandtheemergentmiddleclassmaydrive industry
growth in the next few years: Eastern Europe and Latin America were the fastest growing
regions globally in traditional toys and games in 2012, both recording double-digit value
growth. Asia Pacific is expected to become the biggest traditional toymarket over the next
severalyears(Euromonitor,2013).
TheConstructioncategoryoutperformedoveralltraditionaltoysandgamesbya largemargin
globallywithandannualgrowthrateof15%in2012upfrom14%theyearbefore.Allmarkets
sawan increase in sales, attributable to LEGOwhohas adominantposition in this category,
accountingformorethan62%ofglobalvaluesalesin2012(Euromonitor,2013).
Consideringthatthreequartersoftheworld´stoysaremadeinChina,thecountry’sshrinking
labor market and rising raw material costs may negatively impact many major players’
operationsinthetoyindustry.
SocialandCulturalFactors
Construction toys have become popular among parents seeking to limit the amount of time
their children spend using iPads and other electronicswith screens. Parents are increasingly
looking for products that can stimulate a child’s imagination and creativity. The number of
householdswhere fathers stayathomeandmakemostof the familypurchases is increasing
which has also driven an increase in preference for educative and construction toys
(Euromonitor,2013).
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Children's television viewing habits and the popularity of films will continue to strongly
determine children´spreferences and consequently industrydynamics.Other relevant trends
thatwill impact the industry include: “Age compression phenomenon” (increasing children´s
preferencesforsmartphonesandvideogamesaftertheageof10),andthegrowingolderkid´s
preferencefortoysandgamesinvolvingsocializingactivities.
TechnologicalFactors
Key technological trends include the development of new inexpensive technologies and
emerging tablet toys and games on Apple and Android devices, increasing penetration of
electronicsanddigitalelementsintotraditionaltoys,developmentofappstobeusedastoysor
accessories/complements for traditional toys and toys / games cross-overs (cross-industry
collaborationbetweentraditionaltoys,videogamesandelectronics).
LegalFactors
Key trends towatch include: Import regulations, especially fromChinawhichmaynegatively
impactexpansionplans inemergingmarkets.Globalizationof licenses isexpectedto increase
licensors’ power over licensees and increased product safety regulations are expected to
emergeasaconsequenceofthehighlevelofoutsourcingandoffshoring
EnvironmentalFactors
Eco-friendly toys are emerging as a relevant trend in the industry. In addition, demand for
greater environmental sustainability of products is increasing not only from legislators and
NGOs,butalsofromretailerswhoarereactingtocustomerdemand.
PleaserefertoAppendix4andAppendix5forfurtherinformation.
ALTERNATIVESTOTHEMERGER
AlternativeAcquisitiontoStrengthenMattel’sGlobalPosition
The acquisition ofMEGABrands is an attempt to better positionMattel to compete against
LEGO; however,MEGA Brandsmay not be the best alternative to strengthen its position in
marketswhereLEGOcurrentlyleads.
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Seventy percent of total MEGA Brands’ global net sales come from North America (MEGA
Brands,2013),whichmeanstheacquisitionwouldhaveasignificant impactonthis regionas
the combined company will benefit from the full force of Mattel’s marketing logistics and
operationalinfrastructureinthismarket.Mattelhowever,alreadycontrolsmorethanafifthof
thetoymarketinLatinandNorthAmerica,andMEGABrands’limitedinternationalpresencein
keystrategicmarketssuchasAsiaPacificandEasternEuropeunderminesthegrowthpotential
behindthisacquisition.
Alternatively, withmost of the global forecast revenue expected to come from Asia Pacific,
Mattelcouldconsideracquisitions inthismarketwhichwouldguaranteeastrongfoothold in
the fastest growing markets and would give Mattel a competitive advantage against LEGO
whose dominance is still weak in this region. In China, Takara Tomy and Bandai Namco
accounted for 8% and 7% of traditional toys and games sales in 2012 respectively; both
companiesdeservesomeattentionastheymayofferpotentialgrowthopportunitiesforMattel
inthefuture(Euromonitor,2014).
AcquisitiontoStrengthenMattel’sPositioninAlternativeGrowingSegment
TheacquisitionofMEGABrandswouldprovideMattelwithagrowthplatformbybringingnew
productstoMattel’scurrentofferingsandcomingtoylineup.However,LEGO’sexpertiseand
soliddominantpositioninthiscategorycouldjeopardizetheintendedgrowththatisexpected
tobeachievedthroughthisacquisition.
Further,themarketforconstructiontoys isshowingsignsofslowingasnewentrantssuchas
Hasbro have also entered the market. LEGO has also stated it expects global demand for
buildingblockstobemoderatethisyear(Ziobro,2014).
Mattel could consider acquisitions of companies with a strong dominance in alternative or
complementarygrowingcategoriessuchasdigitalgaming.In2013,digitalgamingremainsone
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of thebestperformingcategories,posting12%valuegrowthdueto therisingpenetrationof
smartphonesandtablets,aswellasnewgamelaunches(Euromonitor,2013).Anacquisitionin
thiscategorycouldhelpMatteltobuildnewcharactersandbrandrecognitionandthereforeit
couldoffergreatergrowthpotentialinthelongterm.
ConstructionLineDevelopment(In-houseorThroughJointVenture)
The acquisition of MEGA Brands was mainly driven by Mattel’s interest in the growing
construction category. Leveraging its internal capabilities and their well-recognized brands,
Mattel could consider developing a construction line on its own or it could find a strategic
partner able to provide the manufacturing and design know-how that Mattel lacks in this
segment. Although this alternative may be feasible, it would take much more time to
implementanditwouldinvolvemuchmorecomplexitythananacquisition.
THEDEALIntoday’sdayandagemanykidsaresurroundedbyavarietyofelectronicgames,suchasvideo
consoles,TVgames,computergames,allmarketconditionsthatmakeithardfortraditionaltoy
manufacturers such asMattel to compete.Many companies such asMattel andHasbro not
only depend on their toy sales but are also increasingly dependent on revenue from their
licensing relationships with movie production companies such as Disney, Pixar etc…
Additionally, toy companies continue to look to ventures into the virtual realm, which hold
tremendouspotentialas they look foralternatesourcesof revenue. Couple these factswith
increasedpressuresfromotherindustryparticipantsandmoreinterestinsustainablesolutions
formanufacturingandshipping,anditbecomesapparentthatthetoyindustryisinastateof
flux.
AnacquisitionbetweenMattelandMEGABrandswouldunlockanumberofsynergiesbetween
thetwocompaniesinbothtraditionalcategoriesaswellassomeofthemorerecentsegments
inwhichtoymanufacturersplay.ThisacquisitionplaysintoseveralareasofMattel’sstrategic
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plan, and we will focus on how each is furthered by havingMEGA Brands in their product
portfolio.
CONSTRUCTIONTOYSCATEGORYIn the traditional toy category, theMEGA Brands’ portfolio consists of arts and crafts toys,
puzzlesandconstructionssets.ItsmostpopularproductisMEGABlokswhichareconstruction
setswith various target audiences. In this category,MEGA Brands competes directly against
LEGOanddespitebeingpresentin17countries,MEGABrandsonlyhasapproximately10%of
themarketshare(EBSCOHost). Eventhoughthis isproportionatelysmall, it isstill leaps-and-
boundsabovewhereMattelcurrentlysits. Despitebeingoneofthelargesttoycompaniesin
theworld,Mattelhasnotbeenabletobreakintotheconstructionsetscategory.Thismerger
willallowthemtoobtainanimmediatefootholdintoamarkettheyhaven’tbeensuccessfulin.
Furthertothis,inrecentyearsMattelhasbeenunderattackinthetoycategoryitdominates,
girl-oriented toys. The LEGO Group has beenmost aggressive with their LEGO Friends and
Duplolines.MEGABrandshasthepotentialtoactasadefensemeasureagainstfurtherLEGO
intrusions.(Wilkinson,2014)
Additionally,Mattel’sproductsaremostlytargetedtowardsyoungerchildrenundertheageof
10,whereasHasbroandLegoproductsareforallagegroups.Thislimitsitsreachfromawider
audience.On theotherhand,MEGABrandsproductsare targeted towardsawideraudience
andhence,Mattelwouldbeabletobenefitfromitasitcanreachthisbroaderaudience.
NON-TRADITIONALTOYSForMattel,theMEGABrandsacquisitionwillextenditsreachintonewandgrowingcategories
that include online gaming related categories. MEGA Brands has numerous license
arrangements for toys targeted at boys including - Halo, Call of Duty, and Assassin’s Creed.
(Wilkinson,2014)ThiswillbringnewopportunitiestoMattel,acompanythathasnothadthe
successitwaslookingforstayingwithnewertrendsandrecognizingtheshiftingdemographics.
MEGABrandshasnumerousfranchiseagreementsthatshouldtranslatewellintofuturegrowth
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opportunitiesandan increasingshareoftheolder,“tween”andearlyteenmarketsegments.
Thisisaclearsynergyopportunityforthetwocompanies.
LICENSINGRELATIONSHIPSMEGA Brands also has licensing relationships with third party companies where it produces
productssuchasHALO®,Skylanders®,CallofDuty®,Assassin'sCreed®,PowerRangers®,Hello
Kitty®,SpongeBobSquarePants®andothers.MattelalsohaslicensingrelationshipswithDisney
and produces products such as Barbie andHotWheels. This acquisitionwill allowMattel to
expand its licensing and entertainment partners and compete betterwith Hasbrowhich has
focusedmoreheavilyonlicensingpartners.(MSNMoney,2014)
Due to theunfavorablegrowthconditions in the industry, LEGOmoved inanunprecedented
directionbyestablishingtheirownfranchisewiththecriticallyacclaimedLEGOmovie. Lego’s
move towards acquiring and licensing their own franchise while also capitalizing on other
franchise agreements is truly a new action in the industry. It is both a threat and an
opportunity that Mattel must capitalize on and owning MEGA Brands with experience in
licenseswhichholdtremendouspotential.(EBSCOHost)
MEGABRANDSTOLEVERAGEMATTELSCALEAnotheraspectof synergiesbetween the twocompanies is thesimilarityof theiroperations,
and theirability tosharedistributionnetworks. Integrationbetween the twocompanieswill
allowMEGABrandstodrasticallycapitalizeonMattel’ssize,growthandscale. (Collins,2014)
MEGA Brands would also be able to take advantage of significant growth outside of North
AmericaasMattelispresentin250markets.(EBSCOHost)Emergingmarketshaveproventobe
lucrative,hencebothMEGABrandsandMattelhaveaspirationstoexpandintoareassuchas
Brazil,China,RussiaandIndia.Thisisbecomingincreasinglyimportantasthetoymarketinthe
UnitedStatesbecomessaturatedandthepopulationcontinuestoage.ProductssuchasMEGA
Blokscouldalsostandtogainmarketsharebyco-brandingwithMattel inareasof theworld
where they are not positioned in themarketplace. This would allow them to capitalize on
Mattel’snamerecognition.(Horowitz,2014)
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Inanefforttostreamlineoperations,thecompanywouldalsobeabletoutilizeandcross-brand
severaloftheirowninternalproductsallowingthemtomoreefficientlyandeffectivelymarket
their products across their entire geographical distribution area. Finally, the two companies
could see increase efficiencies in their purchasing capabilities and deliverymethods as their
productportfolioincreases.(MSNMoney,2014)
PRODUCTIONINNORTHAMERICAWith the risingcostsassociatedwithproduction inChina, the increasedpolitical instability in
other parts of the world, MEGA Brands returned much of their production back to North
America,more specifically,Montreal. That, coupledwith theever-increasingcostsofoil and
the rise in North American sentiment towards sustainability, it is no surprise thatmany toy
manufacturers that relyonmass-productionare starting to return to localproduction that is
increasingly competitive by means of government incentive and high-end technologies that
improvequality control. This is a tremendousopportunity forMattel to establish aworking
modelforreturningsomekeymanufacturingbacktoNorthAmerica,capitalizingonthelatest
technology available to MEGA Brands and perhaps gaining a strong advantage by applying
similarpatternstoencouragepartnershipswithlocalgovernments.
POTENTIALOBSTACLESTOTHEACQUISITION
Shareholders’Approval
ThetransactionannouncedonFebruary28thwasapprovedbytheBoardofDirectorsandithad
thesupportof shareholderswith39%ofMEGABrandsstock, including the foundersand the
firmFairfaxFinancialHoldingsLtd.(whichhadalsoinvestedinMEGABrands);however,certain
levelofdeal riskwas involvedasthearrangementresolutionneededtheapprovalofat least
two-thirds of the votes cast by shareholders and a simple majority of the votes cast by
shareholdersotherthanthefoundersMarcBertrandandVicBertrand(MarowitsR,2014).Of
theMEGABrandsshareholderswhovotedatthemeeting,99.96%wereinfavourofthedeal.
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ProvincialGovernmentApprovalRequired
Additionaldealriskwasinvolvedinthetransactionasthefinalarrangementwasalsosubjectto
the approval of the Superior Court of Québec (Commercial Division) at a final hearing. The
agreementwouldonlybecompleted ifall regulatoryclosingconditionshadbeensatisfiedor
waivedbyTheCourt.
AlternativeBidders
An alternative bidder could also have been an obstacle to the closing of the arrangement
betweenMattel andMEGA Brands. Although there was never an official offer at the time,
Hasbro,hadshowninterest inMEGABrandsseveralyearsagowhentheCompanywasinthe
midstof a turmoil thatnearly sent it intobankruptcy. Theseproblems from theearly2000’s
occurredwhenMEGABrandswassuedbyLEGOforcopyrightinfringement,hadcripplingdebt
andneededtorecallanentirelineoftoysthathadchokinghazards.(EBSCOHost)Recognizing
thispotentialobstacle,MattelincorporatedadefensivemeasurethroughabreakfeeofUS$12
millionincasetheBoardofDirectorsofMEGABrandsterminatedtheagreementinfavorofan
unsolicitedsuperiorproposal.InthiswayMattelsoughttoincreasethecostoftheacquisition
forotherpotentialbidders(Mattel,2014).
VALUATIONThe comparable company analysis and the discounted cash flow method were used to
determineavaluationforMEGABrands.ThevaluationwasperformedasofDecember31,2013
since financial information regarding MEGA Brands and the comparable companies were
readilyavailableforthisdate.ThethreeavailablecomparablecompanieswereMattel,Hasbro,
and LeapFrog Enterprises. Although there was a considerable difference in market
capitalizationbetweenthecompanies,a lackofpublicly tradedcompanies in this sector (e.g.
LEGOandCrayola LLC)meantusing all threeof these companies.MEGABrandshadamuch
largermarket capitalization than LeapFrog although it was significantly smaller compared to
MattelandHasbro.Thecomparablecompanyanalysisprovidedawidepricepershare range
forMEGABrandsbetweenC$15.51andC$24.84withanaverageofC$20.07(Appendix6).
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Thediscountedcashflow(DCF)methodprovidedapricepershareofC$16.36onastand-alone
basisforMEGABrands(Appendix7).Thecompanyhadalowcostofdebtaswellasalowcost
ofequity(ascalculatedusingtheCapitalAssetPricingModel),resultinginaweightedaverage
costofcapitalof5.44%(Appendix8).ConsumerGoods isadefensivesector,whichgenerally
carriesa lowerriskrelativetothemarketandthereforea lowbeta(0.701forMEGABrands).
Thecompany’s revenuegrowthwasassumedtobe10%peryear in2014basedannual sales
dataintheU.S.giventhatMEGABrandsisprimarilyinNorthAmerica.The10%wasanestimate
basedonthe2012and2013averagesalesgrowthintheBuildingsSetscategoryandtheArts&
CraftscategoryinwhichMEGABrandsoperates(TheNPDGroup,2014).Thegrowthratewas
assumedtodeclineby2%peryearoverthenextfiveresultinginaterminalgrowthrateof2%.
Costsasapercentofrevenuewerebasedonfiveyearhistoricalaverages.
Thesynergiesthatwouldbecreatedasaresultofthemergercanbebroadlycategorizedinto
increased revenue and lower costs. Synergies were calculated based on the following
assumptions(Appendix9):
• AccesstoMattel’sbroaderinternationalreach,itsdistributionnetworks,andadditional
licensingcouldincreaserevenueby2%peryearforthenext5years,whichwouldresult
inadditionalvalueofUS$59.3MM.
• MEGABrands could leverage themarketingeffortsofMattel resulting in reductionof
marketing costs of 1% per year for the next 5 years. This will create US$21.9MM in
savings.
• AccesstoMattel’snetworkscouldalso lowerdistributionandadministrativeexpenses
by1%peryearforthenext5years.Giventhatthesecostsaccountedforroughly23%of
revenues,thesavingsgeneratedbythisissignificantatUS$112.5MM.
Thetotalvalueofsynergiesinadditiontothecompany’sexistingvaluewillresultinavalueper
share of C$23.73,which indicates thatMattel could potentially realize approximately 34% in
additionalvaluefromthismergerusingtheestimatesmentionedabove.
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Bloomberg’s analyst estimates asof February27, 2014,onedayprior to theannouncement,
showed five estimates ranging from C$14 to C$19 with an average of C$16.80 (Bloomberg
FinanceL.P.,2014).Theannouncementofthedealwaswelcomebyanalystswhoagreedthat
theacquisitionwashelpfulandwouldcreateinternationalexpansionopportunities,attractive
licensing opportunities, and cost savings (Johnson, 2014) (Linsdell, 2014). Based on the
valuation analysis and considering the potential synergies that can be created, the premium
paidbyMattelatC$17.75pershareisjustified.
Mattel has a strong balance sheet with a cash balance of US$1.039 billion, which is well in
excessoftheMEGABrandsacquisitionprice.AnallcashdealissupportedbyMattel’scurrent
position.Althoughthecompany’sdebttoequityratioisat0.98,itscostofdebtislowgivenits
BBB+ credit rating. The yield on a 7 year bond for example, was around 3.5% (Bloomberg
Finance L.P., 2014). While the use of cash has its risks, it also has the benefit of avoiding
shareholderdilutionandavoidingfuturedividendpayments.
One issue specific to the valuation of MEGA Brands is the company’s revenue growth. The
company’sgrowthdoesnotshowacleartrendthusitisdifficulttopredict.Theindustrygrowth
rate isusedasaproxy tohelpalleviate this issue.Next,MEGABrands isamid-capcompany
while the comparable companies available were small caps and large caps. There was a
noticeabledifference intheratiosofsmallcapsand largecaps,however,bothwere included
given that the size ofMEGABrandswas in between the two. Also, the company’s reporting
currency istheUSdollar.Thus,theexchangerateneedstobetakenintoconsiderationwhen
determiningavaluationforMEGABrands.Theexchangerateusedwastheapproximate5year
annualaverageCADUSDrateof$0.967(OANDACorporation,2014).Theexchangerateplaysa
keyroleindeterminingthecompany’svalue.
SHAREPRICEThesharepriceofMattelandMEGABrandswereexaminedfromJanuary2012untilJune30,
2014(Appendix10).Mattel’ssharepricetrendedhigherin2012andearly2013butstagnated
inthelatterpartof2013.MEGABrandstrendedlower inthefirstthreequartersof2012but
MATTELINC.ACQUIRESMEGABRANDSINC.
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increased significantly over the next year until October 2013when it reportedweaker third
quarter2013earningscausingthesharepricetodecrease.
Inthefirstquarterof2014,Mattelreportedlowerthanexpectedearningsonweakerholiday
demand and its share rating was lowered by various analysts causing the share price to
decreaseby21%untilthedaypriortotheacquisitionannouncement.ThesharepriceofMEGA
Brandsfollowedsuitepossiblyontheexpectationthatittoowouldmissitsearningsestimates.
MEGABrands’ share price decreasedby 14% since the start of 2014 to settle at C$13.07on
February 27, 2014, one day prior to the acquisition announcement. On the day of the
announcement,thesharepriceofMEGABrandsincreasedby36%tocloseatC$17.72,avalue
justbelowtheofferpriceofC$17.75.Mattel’ssharepriceincreasedslightlyby0.4%tocloseat
US$36.94.
From the acquisition announcement date until June 30, 2014, the share price ofMattel has
increasedby6%,whichisexactlyinlinewiththemovementoftheS&P500index.Itisevident
thatMattel’ssharepricehasstabilizedsincetheannouncement,whichisapositivesignforthe
company.Giventhematurenatureoftheindustryandlowbetaforthestock,amovementin
linewiththemarketfurtherreinforcesthepositivenatureoftheacquisitionalthoughalonger
timehorizonwillneedtobeexaminedforthedefinitiveimpactofthisacquisition.
CRITICALMILESTONES
Shareholdervote-March18,2014
Themergerneededtoobtain2/3ofvotescastbyshareholderspresentorbyproxy,andsimple
majorityof votes inpersonorbyproxyof all those that arenot InterestedHolders. (Planof
Arrangement,2014)
December2014
The true value of the acquisition will come to light as themerged entity comes out of the
holiday season asMattel suffered a 10% decline in North American sales last year. (Ziobro,
2014)
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2015FiscalYearEnd
Mattel’s earnings will take a hit in 2014 due to the acquisition, but it is expected that the
companywillobtain futureprofits starting in2015. (Ziobro,2014) Futurepress releasesand
fiscal year-ends should be monitored in order to gauge what effect the MEGA Brands
acquisitionhadonMattel’sbottomline.
RISKSANDROCKYPLACES
INTEGRATIONAPTITUDEThemostapparentrisktothisacquisition’ssuccess isMattel’s lackofcapability inbusinesses
integration. In previous cases, there seemed to limited information sharing and synergy
capture between businesses. Mattel does not traditionallymeddlewith the companies that
theyacquire.(EBSCOHost)Thisisariskforthecompany,asitwillnottakebestpracticesand
apply them to theotherbusinessesandbrands thatare in theirportfolio inorder to remain
competitive. Asoutlinedabove, the companyhas thepotential to gain frommanydifferent
typesofsynergiesandtheappropriatelevelsofinvestmentmustbemade.
INDUSTRYCONSOLIDATIONAs mentioned earlier, the risks exposed by this transaction include the possibility of even
further problems in the competitive environment. Industry professionals argue that Hasbro
andseveralotherlargeplayerswouldbelookingtomakedefensivemeasuresthatmay,inthe
long-termhampergrowthintheindustry.
SUSTAINABILITYINTOYMANUFACTURINGFurther to this, sustainability isbecomingan increasingconcern for the industryparticipants.
NotonlyisthecompanyproductionheavilyfocusedinAsia,thematerialsusedtoconstructthe
toys (for the most part) is made of plastic polymers and other materials that are not
environmentallyfriendly.AtthistimeLEGOislookingtomakechangestotheircurrentplastic
compositions.(CanadianPlasticsJournal,2014)Addtothistheshippingassociatedwithgetting
theseproductsintoNorthAmericanConsumers’hands,anditisarecipeforanon-sustainable
business–somethingconsumersarebecomingmorecognizantof.Ashiftinconsumerdemand
MATTELINC.ACQUIRESMEGABRANDSINC.
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hastremendousconsequences.WiththemovetopurchaseMEGABrands,Mattelhasshielded
itselfagainstthisriskandgetsahead-startwithdirectmanufacturinginNorthAmerica.
INTEGRATIONISSUES
GovernmentSponsorship
MEGABrands has focusedonbringing constructionback to Canada as it investedmillions in
buildingcapacitywithinMontreal. Thismaypresentpotential issuesasthecompaniesmerge
operations. The company is heavily invested in state-of-the-art equipment that allows it to
competewithfactoriesinChinabyimprovingefficiencies.(EBSCOHost)MEGABrandshasbeen
tremendouslyefficientinobtaininggovernmentsupportinQuebec.Thisacquisitionmayimpact
theamountoffundingthecompanyreceives.
CulturalIntegration
Brothers Marc and Vic Bertrand will stay on for one year to ensure a smooth transition.
(Ziobro,2014)Havingowners/founderson-boardforsuchanextendedperiodoftimemayalso
impacttheorganizationandhoweffectivelythetwocompanyculturescometogether.MEGA
Brands was a company that was on the verge of extinction as recently as 2002. It can be
reasonably assumed that the two corporate cultures are very different and that Mattel’s
approach of keeping the businesses separate may be appropriate. If the entities are kept
separate, there may be limited information sharing and no manufacturing/shipping
optimizations,whichmay affect long-termprofitability forMattel. The two companiesmust
cometogethertoimprovetheirexistingindividualpositionsespeciallyiftheyaretojustifythe
premiumthatMattelpaid.
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APPENDICES
APPENDIX1:PORTER’SVALUECHAIN
Figure1ValueChain
PRIMARYACTIVITIES
InboundLogistics
• SKUefficienciesminimizelogisticscosts
• Mattelownsandoperates13DistributionCentres,Manufacturing&ToolingPlants
• Mattel concentrates its efforts on the selectionofwell-qualified licensees and setting
clearexpectationsinthecontractprocessinordertoinfluencebothproductqualityand
workingconditions.
Operations
• Mattel’s Global Manufacturing Principles (GMP) sets the production standards for
Mattelownedfactoriesandthosethatproduceproductsforthem
• Approximately half of Mattel's products are manufactured in one of nine owned
factories:fourinChina,twoinMexicoandoneeachinMalaysia,IndonesiaandThailand
MATTELINC.ACQUIRESMEGABRANDSINC.
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• The other 50% of their products are produced by vendors predominantly located in
Southern China; their vendor manufacturing base is composed of approximately 40
majorvendorsand30 specialtyvendors thatarecalledupon for specificprocessesor
technologiesneededtoproducesmall-volume,non-coreproducts
• Mattel reversed its earlier strategy of outsourcing to factories in Asia by owning and
operatingsomeplantsinAsiaforproducingitsmostpopularproductsinordertobetter
controlproductqualityandsafety
• Matteloperatesmoreaccreditedtestinglabsthananyothertoymakerintheworld
OutboundLogistics
• Thecompanyhasitspresencein40countriesandterritoriesaroundtheworld
• Mattelemployspackagingoptimizationtominimizetransportcosts
MarketingandSales
• Strongbrandportfolio;2013growthledbycorebrands.Barbieistheworld’sNo.1doll
property
• Mattel’sproductaresoldin150countriesbyretailers,aswellasdirectlytoconsumers
Service
• In2011,80%ofMattel’scontactswereweb-based,up10%from2009,andattributedin
parttoimprovementstoMattel’sconsumerwebsites
• Mattelisimprovingitsabilitytolistenandengagewithconsumersthroughsocialmedia
• Mattelreceivescloseto1,000responsesperweekfromcustomerswhotaketheiremail
survey. They constantly seek feedback from our consumers about the quality of the
serviceMattelprovidesandhavemadechangesbasedontheirresponses.
SUPPORTACTIVITIES
FirmInfrastructure
• MattelhasorganizeditsbusinessstructureintotheGlobalBrandsTeam,NorthAmerica
Divisionmodel,andAmericanGirl
• Mattel integrates quality, Global Manufacturing Principles (GMP) and sustainability
performanceconsiderationsintobusinessprocessessuchasnewprojectlaunches
MATTELINC.ACQUIRESMEGABRANDSINC.
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TechnologyDevelopment
• Expandeddigitalcapabilitiestohelpbrandsengagewithcustomers
• Historically, consumer inquiries were handled primarily by telephone, butMattel has
expandedtheirservicessince2009toincludeemail,livechatandsocialmedia
Procurement
• Mattel has numerous suppliers for its raw materials. Materials are evaluated
consideringsafety,quality,durabilityandcompliancewithregulationsworldwide
• In2011,Matteladoptedprinciples toguide thecompany’sprocurementofpaperand
woodfiberusedinpackagingandproducts
• ThecompanyhasinplaceaglobalinitiativecalledTheGlobalCostLeadershipprogram
whichincludesprocurementinitiativesdesignedtofullyleverageMattel’sglobalscalein
areassuchascreativeagencypartnerships,legalservicesanddistribution.
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX2:SWOTSTRATEGIESMATTEL
Strengths•Strongprofitability•Highbrandawareness•Known-brands:Barbie,HotWheels,FischerPrice
•LicencescontentfromDisney•Globalmanufacturingandsourcing
Weaknesses•HeavyreliancesfromlicensingcontentfromDisney•Walmart,TargetandToys"R"Usaccountfor71%ofsalesintheU.S
•Relianceonmovieperformances. Ifamovieisnotsuccessful->lowsalesoftoys
•Lackofpresentintheonlineordigitalentertainmentbusiness
•Productsaretargetedataspecificagerange(under10yearolds)
Opportunities•LicenseMattelproductsouttothirdpartiesforentryintootherverticalmarkets
•DevelopMattel-owned lifestylebrand(i.eBarbieyogamats)
•AcquireacompanyinthesameindustryandexpandMattelportfolio
Threats•Electronicgamesmoreattractivetoyoungeraudiencesthantraditionaltoys
•Recalloftoysin2007negativelystillaffectsMattel'sbrandwithconsumersandlicensees
•Foreignexchangefluctuationrisk•Politicalunrest,labourstrike
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX3:SWOTSTRATEGIESMEGABRANDS
Strengths•Profitabilityandfinancialperformance•Strongbrandawareness•Known-brands:MEGABLOKS,MEGAPUZZLES,ROSEART
•Strongrelationshipswithcompaniestosecureaccesstoproductseriesandliscencingpacts(Nickelodeon,Disney)
•Globalmanufacturingandsourcing
Weaknesses•Lossesduetoproductrecalls(Magnetix)•Volatileperformance•Mostlyconcentrated inCanadaandNorthAmerica.
•Lowmarketshareininternationalmarkets•CompanyhasfacedlawsuitsfromplayerssuchasLEGOinthepast.
Opportunities•Movement fromphysicaltoystovirtualtoys•Innovativeandefficientdesignprocesseswouldallowcompaniestocapitalizeonchangingconsumerpreferences
•Rightstomanufactureandsellbrandtitlesbeyondthechildren'scoremarket
•Internationaloperationsallowforfurtherglobalexpansion
Threats•Strongcompetitionwithdominancebylargeplayers
•Strictrulesandregulations•Retailershavesignificantinfluenceintermsofdeliverytimesandshelfspace
•Industryisseasonalandalsodependent oneconomicactivity
•Stagnantindustrygrowth•Industryparticipantsheavilyreliantonexportactivity.
•Globaloperationscreatesadditionalrisksduetocurrencyfluctuations,politicalunrest,labourdisputes
•Knockoffbrandsandcounterfeitgoodscanreduceprofitability
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX4:FIVEFORCESANALYSIS
BARGAININGPOWEROFSUPPLIERS(MEDIUM)
Industry
§ Mattel’srawmaterialsconsistofplastic,resins,metals,alloysandfabric.(Hoover'sOnline)
Ingeneral,duetoitsstrongglobalbrandpresencethebiggesttoymanufacturerssuchas
Mattel,HasbroandLegohaveahugebargainingpowerovertheirsuppliers
§ Most toy companies have their ownmanufacturing facilitieswhere labour is outsourced
fromlowcostlabourcountriessuchasChina
§ Toycompaniesestablishlicensingrelationshipswithmediacompaniesthatallowthemto
produce toys for their brands. Given that licensing creates a significant share of their
revenue,licensorshaveastrongpoweroveritssuppliersassuppliersoflicensingrightsfor
theirvaluablebrands.
Mattel’sPosition
§ ThereexistsarealthreatofshortagesininputssuchasthatexperiencedbyMattelinthe
past(Mattel,Inc.,2013)Further,Hasbrohascitedongoingrisksintheirannualreportdue
tothevolatilityinpricesofrawmaterialsreinforcingtheriskmanufacturersinthisindustry
facedwithfluctuatingrawmaterialandcomponentprices.
§ MattelownsfacilitiesformanufacturinginAsia-PacificandMexicowherebothwagesand
productioncostsarelow.(Hoover'sOnline)
ExistingRivalry
(MEDIUM)
ThreatofSubstitutes(MEDIUM->Growing)
BargainingPowerofCustomers(MEDIUM)
BargainingPowerofSuppliers(MEDIUM)
ThreatofEntry(LOW)
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§ Mattel’s largest licensingrelationship iswithDisney.Thelion’sshareof$262MillionUSD
that Mattel spent in 2011 on license acquisitions is attributed to Disney. (Euromonitor
International,2013)WhileMattel’sstatusasthelargesttraditionaltoymanufacturerinthe
worldprovidesthemwithagoodbargainingpositionagainstDisney,thisdependenceisa
risk forMattel as any future difficulties in renewing such license could have a material
effectonMattel’srevenues.(EuromonitorInternational,2013)
§ Significant increases inthepriceofcommodities,transportation,or labor, ifnotoffsetby
declines in other input costs, or a reduction of costs of the delivery of raw materials,
componentsandfinishedproductsfromMattel’svendorscouldnegativelyimpactMattel’s
financialresults.(Mattel,Inc.,2013)
§ Any material failure, inadequacy, or interruption resulting from third party vendors or
outsourcings couldharmMattel’s ability toeffectivelyoperate itsbusiness. (Mattel, Inc.,
2013)
§ WhilepriceshaveincreasedforrawmaterialsandlabourinAsia intheperiodpost2009,
Mattelhascounteredsuccessfullybyraisingtheirownpricesandimprovinggrossmarginin
the process. (Townsend, 2012) This indicates thatwhile there is the risk of volatility of
inputs with regards to cost, price elasticity of demand is relatively low for Mattel’s
consumers.
BARGAININGPOWEROFCUSTOMERS(MEDIUM)
Industry
Customersarecomprisedof:
o Traditionallarge,mediumandsmallretailers-Walmart,Target,Toys-r-us,etc.
o Onlineretailers-Amazon
o Individualcustomers
§ Individually, consumers have low power relative to the manufacturers in the industry
howeverinaggregate,economicfactors,trends,demographicscanhaveastrongeffecton
theindustryandthusdriveuptheirbargainingpower.
o Global child population had been declining due to falling family sizes however this is
expected to be a short-lived phenomenon as developing countries populations grow.
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(EuromonitorInternational,2011)Thisaspectofdemographicsisextremelyimportant
for Toymanufacturers given that “growth in the population of children aged 12 and
youngerdrivesdemandsfortoys.”(Hoover'sOnline)
§ Consumer spendingpower largely influences industry’s revenuesand thusprofits. In this
respect,thegeneralstateoftheeconomy,availabledisposableincomeandunemployment
areallleadingindicatorsofwhatdirectiontheindustrywillhead.(IBISWorld,2013)
§ Industry is highly seasonalwith the peak occurring during the traditional holiday season
(leadingtowardstheendofthefourthquarter).Thishasanaggregatingeffectwithregards
toconsumersinfluencingtoymanufacturer’sschedules,particularlyaroundproductionand
productreleases.
§ ThelargerretailerssuchasWalmarthavebeendevelopingtheirownprivate-labeltoysthat
would take shelf space away from branded traditional toys aswell as compete directly.
(Mattel,Inc.,2013)
Mattel’sPosition
§ ThereisarelativelylowpriceelasticityofdemandwithrespecttocustomersofMattel
§ Mattelhasdemonstratedtheyaretoacertainextent,apricesetterinthisindustry.
§ The threat of Mattel’s major retailer customers such as Walmart developing their own
competitiveprivate-labeltoysthatwouldcompetewithMattel’sofferingshasbeencited
asariskbyMattelthemselvesintheirannualreport.(Mattel,Inc.,2013)
§ Mattelenjoyshighconsumerloyaltythroughtheirstrongbrandequitypositionthatwould
servetomitigatethisthreattoacertainlevel.
§ Mattel’sbusinessishighlyseasonalanditsoperatingresultsdepend,inlargepart,onsales
duringtherelativelybrieftraditionalholidayseason.(Mattel,Inc.,2013)
THREATOFNEWENTRANTS(LOW)
Industry
§ GlobalmanufacturerssuchasMattelandHasbrohaveeconomiesofscaleandeconomies
ofscope.
§ Long-term licensing agreements for most lucrative film, sporting properties in place
present barriers given that licensed toys account for a large percentage of the toy
MATTELINC.ACQUIRESMEGABRANDSINC.
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industry’srevenues.“IntheUS,forinstance,licensedtoysaccountedfor26%oftraditional
toysandgamesalesin2011.”(EuromonitorInternational,2013)
§ Capitalizationcostsarehighforcompetitorslookingtocompeteglobally.
§ Establishingrelationshipswithtoyretailersandglobaldistributors.
o Globaldistributionnetworks
o Relationshipswithtoyretailersandshelfspace.
§ Barriers to entry for substitute industries are relatively low (Mobile device software,
gamingcontent,etc.)
Mattel’sPosition
§ Significant changes in currency exchange rates or the ability to transfer capital across
borders could have a significant adverse effect on Mattel’s business and results of
operations.(Mattel,Inc.,2013)
o Matteloperates facilitiesandsellsproducts innumerouscountriesoutside theUnited
States. During 2012, Mattel’s net sales to international customers comprised 46% of
Mattel’s total consolidated net sales.Management expects that sales to international
customerswillcontinuetoaccountforasignificantportionofMattel’ssales.
THREATOFSUBSTITUTES(MEDIUM->GROWING)
Industry
ExamplesofSubstitutes:
§ AppleiPad,AndroidTablets,mobilesmartphones
§ PCs,Laptopswitheducationalortargetedcontent/softwareforchildren
§ Videogameconsolesandhandheldgamingdevices
§ The threat of substitutes is growing thereby will have an impact on the traditional toy
industry’sprofitsinthelongerterm.
o Qualityofsubstitutesisincreasingasplatformsmature,developersbecomemoreadept
at leveraging the capabilitiesof suchplatforms indevelopinghigherquality andmore
compellingcontent.Devicetechnologyisimprovingatarapidpaceenablingnewforms
ofinteractivityandenhancedcontent.
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o Relatively low switching costs involving primarily the base platform or device and
incrementalcostsforcontentforthoseplatforms.Onceaconsumerhasbought intoa
deviceplatform,therearepotentiallypowerfulnetworkeffectsthattiethatconsumer
into the platform (such as with gaming consoles, a mobile device platform such as
AndroidoriOS,etc.)
Mattel’sPosition
§ Mattel’sbusinessishighlyseasonalanditsoperatingresultsdepend,inlargepart,onsales
duringtherelativelybrieftraditionalholidayseason.
§ Inaccuratelyanticipatingchangesandtrendsinpopularculture,mediaandmovies,fashion,
ortechnologycannegativelyaffectMattel’ssales.(Mattel,Inc.,2013)
§ Due toahighpercentageofMattel-brandedproducts coming from licenseswithDisney,
otherthird-parties,threatofentryofnewplayersposesasignificantrisktoMattel losing
theselicensingagreements.(Mattel,Inc.,2013)
§ Franchises and licensed product lines of the major manufacturers such as Mattel and
Hasbro serve as strong counters to substitute threats as no direct substitutes (although
theycanbecomplements)cancompetedirectlyforsuchproductsthatareindemandby
consumers.
§ Theproductionandsaleofprivate-labeltoysbyMattel’sretailcustomerssuchasWalmart
andToys-R-USmay result in lowerpurchasesofMattel-brandedproductsby those retail
customers.(Mattel,Inc.,2013)
o In recent years, consumer goods companies, including those in the toy business,
generallyhaveexperiencedthephenomenonofretailcustomersdevelopingtheirown
private-label products that directly compete with the products of traditional
manufacturers. Some retail chains that are customersofMattel sell private-label toys
designed,manufactured and branded by the retailers themselves. These toysmay be
sold at prices lower than comparable toys sold by Mattel and may result in lower
purchasesofMattel-brandedproductsby these retailers. In somecases, retailerswho
sell these private-label toys are larger thanMattel and may have substantially more
resourcesthanMattel.
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EXISTINGCOMPETITIVERIVALRY(MEDIUM)
Industry
Majorplayers:
o MattelandHasbroarethelargestfirmsintheglobaltoymanufacturingindustry.
o Lego(privatelyheld,limitedfinancialinformation)
§ Bysomereports,Legohasrecentlybecomethenumbertwomanufacturerbasedon
2012revenues.(Gottlieb,2013)
o NamcoBandai,TomyCo
o Collectivelyaccountfor>85%ofrevenuesintheindustry
§ Theindustryishighlycompetitivewherefirmsjostleforsecuringlicensestoproducetoys
formajorfilm,television,comicandothermarketablefranchises.
§ Firmsarealsounderpressuretodevelopnew in-housefranchises inadditiontosecuring
long-termlicenseagreements.
§ Thethreelargestfirms,Mattel,HasbroandLegoareessentiallyanoligopolywithenough
powerandbrandrecognitiontokeeppriceshighenoughtogenerateattractivemargins.
Mattel’sPosition
§ Mattelaccountsfor~30%ofrevenues,thelargestsingleplayer
o EstablishedeconomiesofscalewithownershipoffactoriesinChinaandMexico.
§ Mattel’slargestbrandsarewell-knownglobally:
o Barbie, HotWheels, Disney-licensed brands, including Toy Story, Cars, Fisher-Price to
targetyoungchildren
§ Highlevelsofcompetitionmakeitdifficulttoachieve,maintain,orbuilduponthesuccess
ofMattel’sbrands,products,andproductlines.(Mattel,Inc.,2013)
o “Mattel faces competitors who are also constantly monitoring and attempting to
anticipate consumer tastes, seeking ideas which will appeal to consumers and
introducingnewproductsthatcompetewithMattel’sproducts.Inaddition,competition
foraccesstoentertainmentpropertiescouldlessenMattel’sabilitytosecure,maintain,
andrenewpopularlicensestoentertainmentproductsdevelopedbyotherpartiesand
MATTELINC.ACQUIRESMEGABRANDSINC.
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licensed to Mattel or require Mattel to pay licensors higher royalties and higher
minimumguaranteedpaymentsinordertoobtainorretaintheselicenses.
§ In2012,Mattel’sthreelargestcustomers,Walmart,Toys“R”Us,andTarget,accountedfor
approximately37%ofnetsales,anditstenlargestcustomers,intheaggregate,accounted
forapproximately47%ofnetsales.(Mattel,Inc.,2013)
o Liquidity problems or bankruptcy of Mattel’s key customers could have a significant
adverseeffectonMattel’sbusiness,financialconditionandresultsofoperations.
• Mattel’sability tomeetcustomerdemanddepends, inpart,on itsability toobtaintimely
andadequatedeliveryofmaterials,partsandcomponents from its suppliersand internal
manufacturingcapacity.
§ 85%ofindustryrevenuesattributedtofivefirms.
o Oligopolystructure-higherindustryprofitabilityamongstlargerfirms.
§ Industrystructurechangingduetoprimarilytohighthreatfromsubstitutes
o Lowerprofitability in the longer term implies the industrymaydeclineover the long-
term.
§ Even though there is strong revenue growth opportunities in emerging markets,
thesehavelowerprofitabilityduetothelowerpricepointsexpectedinsuchmarkets.
Firmsintheindustrywillneedstrategiesthatwillpositionthemaccordingly,inordertoprotect
againstthisgrowingthreat.
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX5:PESTLEANALYSISOFTHETOYINDUSTRYEconomic • Emerging markets economic development and the emergent middle class
coulddriveindustrygrowthinthenextfewyears:EasternEuropeandLatinAmerica were the fastest growing regions globally in traditional toys andgames in 2011, both recording a double-digit value growth. Asia Pacific isexpectedtobecomethebiggest traditional toymarketover thenextyears(Euromonitor,2013)
• TheConstructioncategoryoutperformedoveralltraditionaltoysandgamesbya largemargingloballywithandannual growth rateof15% in2012upfrom14%theyearbefore.Allmarketssawanincreaseinsales,attributabletoLEGOwhohasadominantpositioninthiscategory,accountingformorethan62%ofglobalvaluesalesin2012(Euromonitor,2013)
• EventhoughChinacontinues tobe themost importantsourceof toys, thecountry is losing the competitive advantage as operating conditions forfactoriesremainchallenging,withquadruplingblue-collarwages,ashrinkinglabormarket,andrisingrawmaterialcosts.Thistrendmayforcetoysmakersto look for different sourcing alternatives over the next few years (ToyIndustryAssociation,2013)
Socio/Cultural • Whileelectronictoyscontinuetogrowth inpopularity,theamountoftimechildrenspendplayingonthesedeviceshasbecomeaprimaryconcern forparents around theworld. In addition, parentswith less recreational timeincreasingly prefer toys that their children can safely play by themselves.(IBIS World, 2013). As a result, Construction toys have become popularamong parents seeking to limit the amount of time their children spendusing iPads and other electronics with screens. Parents are increasinglylooking for products that can stimulate a child’s imagination and creativity(Euromonitor,2013)
• Children's television viewing habits and the popularity of forthcomingchildren'sfilmswillcontinuetostronglyinfluencechildren´spreferencesandtherefore industrydynamics.Viewershipofglobal televisionchannels, suchas Nickelodeon and Cartoon Network, is spreading in emerging markets,supporting the brands tied up with children's programmes. (Euromonitor,2011)
• Age Compression Phenomenon: Increasing children´s preferences forsmartphonesandvideogamesafter theageof10 can threaten traditionaltoysmakers thatmay find itdifficult toretain thisaudience. (Euromonitor,2011)
• Socializing andwanting to interactwith others is a dominant factor in thewayolderkids(>10)areplaying.Thistrendisanopportunityfortoymakersto retain the tween/teen market through new product developmentinvolvingsocializingelements.(ToyFairTimes,2013)
• Fathersaredoingmoreofthefamilyshoppingasthenumberoftwo-income
MATTELINC.ACQUIRESMEGABRANDSINC.
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householdsandthoseinwhichthewomanworksandthemanstaysathomecontinues to grow (In the U.S. one-fifth of fathers with preschool-agechildrenandworkingwives said theywere theprimary caretaker in2010).Thistrendisexpectedtodrivesalesincategorieslikeconstructiontoysthatappealmoretodads.(Clifford,2012)
Technology
Trends
• NewinexpensivetechnologiesandemergingtablettoysandgamesonAppleandAndroiddevicescontinuetobereleased,andtheirofferingsarevaried.It is expected that these technologies will continue to cut into traditionaltoys sales.NPD’s list of the top toys of 2012 shows that Leap Enterprises’children’s tabletsareamong fourof theyear’s10biggest sellers, includingpositions1,2and4(Goldberg,2013).AccordingtoIBISWorldelectronictoyswill make up the largest product segment for toy, game and dollmanufacturers, accounting for an estimated 32.9% of industry revenue in2013.(IBISWorld,2013)
• Increasingpenetrationofelectronics, incorporationofdigitalelements intotraditional toys (i.e. plush toys) and growing demand for intelligent andinteractive toys isexpectedto increaseover thenext fewyears.This trendcanpushnon-toyscompanies(likeMicrosoftandIntel)toaddtheirofferingstothemarket.(Reportlinker,2013)
• Toys and Games Cross-overs: Emerging trends towards cross-industrycollaboration between traditional toys, video games and electronics areexpected to increase. Hasbro and LEGO havemoved from traditional toysand games into video games via collaborations with Electronic Arts andTraveller'sTales,respectively.(Euromonitor,2011)
Legal • Import Regulations: taking into consideration that approximately threequartersoftheworld´stoysaremadeinChina,anyimportrestrictionsfromChina on the grounds of toy quality or safety may negatively impactexpansionplans inemergingmarketsof toyscompanies thatproducetheirproductsinthiscountry.(Euromonitor,2011)
• LicensesRisk:Thereisatrendtowardsglobalisationoflicences;forinstance,the top10 licensors in2011are set toaccount for80%of licensed toys inWestern Europe. This trend is increasing licensors’ power, giving them theability to dominate licensing agreement conditions. In addition, somepowerfullicensors(i.e.WaltDisney)aremovingintooperatingitsownstoresputtingtoymakersatriskoflosingkeylicenses.(Euromonitor,2011)
• Increased product safety regulations are expected to emerge as aconsequenceofthehighlevelofoutsourcingandoffshoring(relocationofacompany’sbusinessprocessfromonecountrytoanother).Thistrendcouldput increasedpressureon toysmanufacturersas regulationsdifferenough
MATTELINC.ACQUIRESMEGABRANDSINC.
39|P a g e MergersandAcquisitions–SGMT6050
to result in complex and costly compliance and testing to better controlqualityandsafetystandards(IBISWorld,2013)
Environmental • Environmentally friendly andhazard-free features are expected tobecomesomeofthemainsellingpointsoftraditionaltoysandgamesoverthenextyears.Asaconsequence,green,eco-friendlytoysareincreasinglyemerging.For example, at the New York Toy Fair in 2013 and in South America´sbiggest toys event, environmentally friendly dolls as well as gamespromoting green practices like recycling were strongly promoted.(Fontenelle,2013)
• Demandsforgreaterenvironmentalsustainabilityofproductsareincreasing,notonlyfromlegislatorsandNGOs,butalsofromretailers.Increasinggreeninitiatives like the “ Extended Producer Responsibility in the U.S.(requirements formanufacturers of specified consumer products to eitheraccept back products at the end of their useful life or to subscribe to acollectivearrangementtodoso)continuetoemergearoundtheworld.(ToyIndustryAssociation,Inc.,2012)
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX6:COMPARABLECOMPANYANALYSIS
*ComparableratioswereobtainedfromBloombergwhiletheMEGABrandscompanyspecific informationwasobtainedfromthecompany’s2013AnnualReport.The comparable company analysis provided a wide range of prices for MEGA Brands between US$15.00 andUS$24.02withanaverageofUS$19.41.ThistranslatestoaCanadiandollarequivalentrangeofC$15.51to$24.84withanaverageofC$20.07.
Company EV/EBITDA Market Cap / Earnings Market Cap / Book value Market Cap to SalesMattell 12.25 19.33 4.96 2.10 Hasbro 12.17 22.40 4.24 1.75 Leap Frog 6.88 6.67 1.29 0.99 Average 10.43 16.13 3.50 1.61
*Jakks Pacific was considered as a comparable, however, the company has negative earnings and is significantly smaller than Mega Brandsand therefore excluded. Leap Frog was still included although it is a small cap compared to the other competitors. This is because MegaBrands is a mid cap while Mattell and Hasbro are considered large caps. Many toy companies such as LEGO and Crayola are private thus noinformation is available.
MEGA Brands Adjusted EBITDA 47.00$ EV/EBITDA Average 10.43 TotalEnterpriseValue 490.37$(-)FairValueofDebt 64.19$(-)MinorityInterest -$(+)Cash&CashEquivalents 16.42$EstimatedMarketCap 442.60$SharesOutstanding 27,186,768 PriceperShare 16.28$ DilutedEarningsperShare 0.93$ AverageMarketCaptoEarnings 16.13 PriceperShare 15.00$ BookValue 173,611,000$ BookValueperShare 6.39$ AverageMarketCaptoBookValue 3.50 PriceperShare 22.33$
Sales 404.74$ SalesperShare 14.89$ AverageMarketCaptoSales 1.61 PriceperShare 24.02$
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX7:DISCOUNTEDCASHFLOWMETHOD
ThepricepersharebasedonthediscountedcashflowmethodisUS$15.82orC$16.36
Assumptions:• Interestexpensewasassumedtobeconstantbasedoncurrentratesandcurrentdebtoutstanding.Thus,the
companyisexpectedtotakeondebtasdebtisretiredatcurrentrates.• Taxesarebasedonthecompany’scurrenttaxrate.NoTaxrecoveryisassumed.• DepreciationandCapitalExpenditureswerebasedon3yearaveragessincethesevalueswereveryconsistent.• Giventheswingsinnetworkingcapitalchanges,thisvaluewasassumedtobezero.• Costsasa%ofrevenuewerebasedon5yearaverages.• Revenuegrowthrateof10%isassumed,whichwilldecline2%peryeartoreachaterminalgrowthrateof2%.• OncethevalueisdeterminedinUS$,itisconvertedtoC$usinga5yearaverageexchangerateof0.967CADUSD.
MegaBrands($MM) 31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018
NetSales 338.90$ 368.00$ 376.80$ 420.27$ 404.74$ 445.21$ 480.83$ 509.68$ 530.07$ 540.67$CostofSales 219.10 222.70 235.60 262.45 255.70 278.99 301.31 319.38 332.16 338.80GrossProfit 119.80$ 145.30$ 141.20$ 157.82$ 149.04$ 166.23$ 179.52$ 190.29$ 197.91$ 201.86$
Marketing&Advertising 14.20 19.40 17.00 16.94 18.23 20.04 21.64 22.94 23.86 24.34Research&Development 11.40 12.30 14.50 16.22 15.39 16.22 17.52 18.57 19.31 19.70Selling,Distribution,&Admin.Expense 88.00 95.40 82.50 87.83 84.06 102.80 111.03 117.69 122.39 124.84Other 55.80- 0.30 2.40 0.96 1.46- - - - - -OperatingIncome 62.00$ 17.90$ 24.80$ 35.88$ 32.82$ 27.16$ 29.34$ 31.10$ 32.34$ 32.99$
InterestExpense 43.90 25.80 18.70 17.65 10.77 5.02 5.02 5.02 5.02 5.02OtherExpense(Income) 7.70 144.30- 3.00 - 2.87 - - - - -IncomeBeforeTaxes 10.40$ 136.40$ 3.10$ 18.23$ 19.18$ 22.15$ 24.32$ 26.08$ 27.32$ 27.97$
IncomeTaxExpense(Recovery) 0.30- 5.50 5.20- 1.64 1.59- 5.92 6.50 6.97 7.31 7.48NetIncome 10.70$ 130.90$ 8.30$ 16.59$ 20.77$ 16.22$ 17.82$ 19.11$ 20.02$ 20.49$
Depreciation 17.61 11.41 13.50 12.90 13.81 13.40 13.40 13.40 13.40 13.40ChangesinWorkingCapital 0.73- 14.70 24.01 14.41- 7.71 - - - - -CapitalExpenditures 7.10 9.98 23.25 19.23 20.23 20.90 20.90 20.90 20.90 20.90
OperatingIncome 62.00 17.90 24.80 35.88 32.82 27.16 29.34 31.10 32.34 32.99(-)Taxes 0.30 5.50- 5.20 1.64- 1.59 5.92- 6.50- 6.97- 7.31- 7.48-(+)Depreciation 17.61 11.41 13.50 12.90 13.81 13.40 13.40 13.40 13.40 13.40(-)IncreaseinWorkingCapital 0.73 14.70- 24.01- 14.41 7.71- - - - - -(-)CapitalExpenditures 7.10- 9.98- 23.25- 19.23- 20.23- 20.90- 20.90- 20.90- 20.90- 20.90-FreeCashFlow 73.55$ 0.87-$ 3.76-$ 42.30$ 20.28$ 13.74$ 15.33$ 16.62$ 17.53$ 18.01$
WACC 5.44%TaxRate 26.74%PresentValue 13.03 13.79 14.17 14.18 13.81
TerminalValueGrowthRate 2%TerminalValueasof31/12/2018 533.16$PVasof31/12/2013 408.95$TotalEnterpriseValue 477.93$
(-)FairValueofDebt 64.19$(-)MinorityInterest 0(+)Cash&CashEquivalents 16.417EstimatedMarketCap($MM) 430.17$
SharesOutstanding 27,186,768 PriceperShare 15.82$
RevenueGrowthRate 8.6% 2.4% 11.5% -3.7% 10% 8% 6% 4% 2%Margin(as%ofRevenue)CostofSales 64.7% 60.5% 62.5% 62.4% 63.2% 62.7% 62.7% 62.7% 62.7% 62.7%Marketing&Advertising 4.2% 5.3% 4.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%Research&Development 3.4% 3.3% 3.8% 3.9% 3.8% 3.6% 3.6% 3.6% 3.6% 3.6%Selling,Distribution,&Admin.Expense 26.0% 25.9% 21.9% 20.9% 20.8% 23.1% 23.1% 23.1% 23.1% 23.1%
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX8:MEGABRANDSWACC
WeightedAverageCostofCapital=5.44%
APPENDIX9:POTENTIALVALUEOFSYNERGIES
ValuesinUS$millions.ThevaluepershareinCanadiandollarsisC$23.73
Cost of Equity - Capital Asset Pricing Model Risk Free Rate 2.865% 10 year Government of Canada BondsBeta 0.701 Obtained from Bloomberg. Beta less than 1 indicates company is less volatileMarket Return 6.87% 10 year average return of the S&P/TSX IndexCost of Equity 5.67%
Settlement Date 31/12/2013Maturity 30/03/2015Price 105.39$ Coupon 10%Frequency 2Yield / Cost of Debt 5.45%Tax Rate 26.74%After Tax Cost of Debt 3.99%
Company conducted a private placement of secured debentures in 2010. Based on the company's recent partial redemption of the bond, a price of $105.39 isestimated and used to calculated the current yield. Given that these bonds are private, no market value of debt is currently available and no fair value isdisclosed.
Fair Value of Debt 64.19$ Company redeemed $53.8 million in principal amount of debentures and recorded a $2.9 million charge. This amounts to a 5% premium added to the face value of $61.13 million.
Fair Value of Equity 413.51$ Based on 2013 year ending share price of $15.21 and fully diluted shares of 27,186,768Total 477.70$ Percent of Debt 13%Percent of Equity 87%Total 100%
Stand-AloneMarketCap 430.17$
Increasedrevenueasaresultofaccesstonewmarketsanddistributionchannels 59.26$LowerMarketing&Advertisingby1%eachyearforthenext5years. 21.92$LowerSelling,Distribution,&Admin.Expensesby1%eachyearforthenext5years. 112.46$Synergies 193.64$TotalValue 623.81$ValueperShare 22.95$
MATTELINC.ACQUIRESMEGABRANDSINC.
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APPENDIX10:STOCKPERFORMANCE
(YahooFinance,2014)
Toy companies have come under pressure over the last year andMattel has lagged. The acquisition ofMEGABrandsbringsanewmarketandopportunitiesofscaletothecompany.
(MSNMoney,2014)
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Jan-2012 Mar-2012May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014May-2014
Percen
tCha
nge
SharePriceComparisonMattellvsMegaBrands
MATTEL MEGABRANDS S&P500
MATTELINC.ACQUIRESMEGABRANDSINC.
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