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Mattel Turns Down MGA Entertainment Merger Deal, Stock Up


Shares of Mattel, Inc. MAT jumped 5.3% yesterday, after the company rejected a merger offer from privately held MGA Entertainment. Notably, this was the second time that Mattel has rejected this offer.

Mattel said that the offer was “not in the best interests of Mattel and its shareholders.” MGA Entertainment CEO, Isaac Larian, renewed offer was based on the condition that following the merger he would become Mattel’s chairman and CEO. He also wanted all of Mattel’s current directors to step down “without any further compensation.”

Although Larian did not reveal the value of the offer, he stated that the proposed deal would be at premium of Mattel’s present market price. Furthermore, he added that Mattel’s problems have intensified since his first merger offer in April, 2018.

Persistent Challenges

Toys “R” Us liquidation, a tighter retail inventory and soft consumer demand have affected Mattel’s results in the past. In the first quarter of 2019, Mattel’s net revenues declined 3% year over year (on a constant-currency basis) due to a negative impact of the Toys ‘R’ Us liquidation. It also led to a sales slump across most brands under Mattel.

On the top-line front, lack of cutting-edge schemes for brand awareness and innovation is weighing on the company’s performance. Though overall POS has been mostly positive owing to Mattel’s efforts to lower retail inventories, the improvement is not broad based. We need to wait for more consistent progress across all its brands.

Moreover, Mattel’s operations in China have been a drag in recent times. China operations have excessive retail inventory, which is detrimental to Mattel’s profitability. Also, the company is struggling with managing inventory efficiently in China and reaching an optimal demand-supply balance. In the first quarter of 2019, Mattel’s net sales declined 3% owing to slowdown in China operations.

Regarding share price performance, it is imperative to mention that the stock has underperformed the industry in a year’s time. Shares of Mattel have lost 36.5% compared with the industry’s 31.7% decline.

These apart, Mattel suspended its quarterly dividend payout of 15 cents per share, beginning from the fourth quarter of 2017, to augment financial flexibility, fortify balance sheet and facilitate investments. The dividend suspension negatively impacted the company’s share-price performance.

Zacks Rank & Key Picks

Mattel has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include Hasbro, Inc. HAS, Electronic Arts Inc. EA and Glu Mobile Inc. GLUU, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hasbro, Electronic Arts and Glu Mobile has a long-term earnings growth rate of 10.7%, 16.5% and 15%, respectively.

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