Too many toys? Mattel-Hasbro fate rides on antitrust math

February 5, 2016

A proposed merger of Hasbro Inc. and Mattel Inc., an entity that could account for close to half the toys sold in U.S. mass-market outlets, would need to win approval from antitrust officials in Washington who are increasingly saying no to deals marrying the dominant players in an industry.

Competition watchdogs, who are grappling with a logjam of mergers following a frenzy of deal-making last year, have taken an aggressive stance against tie-ups in concentrated industries, opposing transactions such as Comcast Corp.’s bid for Time Warner Cable Inc. and the merger of American Airlines and US Airways.

An antitrust review of a Mattel-Hasbro tieup, which would probably fall to the Federal Trade Commission, will hinge on how broadly officials define the market, according to Jonathan Kanter, a lawyer at Cadwalader Wickersham & Taft LLP in Washington, D.C.. If the review focuses narrowly on the companies’ overlaps in specific toy categories, the makers could likely sell off a few product lines to win approval, he said.

If enforcers take a broader view and see the combination as uniting the two biggest toymakers in the U.S., leaving just Denmark’s Lego A/S as their next biggest competitor, the deal could be in for a rough ride, he said.

“Are they going to look at it through the traditional approach of the last 20 years, which has been focused mostly on defining narrow markets and evaluating the merger segment by segment?” said Kanter. “Or are they going to continue the trend of looking at deals more holistically and examine them based on the broader impact? That’ll ultimately determine the fate of the deal.”

Merger flurry

U.S. antitrust enforcers are responding forcefully to the flurry of mergers in highly concentrated industries and may be emboldened by recent victories. Mega deals pending in industries including health insurance, drug stores, pharmaceuticals and chemicals are facing scrutiny from the FTC and the Justice Department, which share antitrust enforcement authority.

The possible toy deal, reported by Bloomberg News on Thursday, would bring together Mattel’s strength in the girls’ category – which includes Barbie and American Girl lines – and Hasbro’s dominance over toys traditionally aimed at boys, including Transformers and Star Wars action figures. It would make the combined company a stronger competitor to Lego, Europe’s biggest toymaker, which has been growing faster than either of its U.S. rivals.

Mattel Chief Executive Officer Chris Sinclair is looking to revive the company’s Barbie business after losing market share in recent years to Lego as well as Hasbro’s reinvigorated My Little Pony brand. Revenue at El Segundo, California-based Mattel is set to take a hit this year as the licensing rights to Walt Disney Co.’s lucrative Frozen and Princess brands shift to Hasbro, which is based in Pawtucket, Rhode Island.

Failed before

Mattel has tried and failed before to buy Hasbro. Two decades ago, Mattel withdrew a $2.5 billion offer for Hasbro, citing an “intolerable climate” created by its competitor’s use of the media and politicians to fight the proposed takeover. Hasbro said at the time that antitrust obstacles to an accord would be insurmountable.

The combined company would control about 34 percent of the U.S. toy market and 45 percent of the mass market, which excludes specialty toys that sell through alternative channels, said BMO Capital Markets analyst Gerrick Johnson in a note. Because of that, a Mattel-Hasbro combination wouldn’t be able to win antitrust approval, Johnson said. Hasbro and Mattel derive much of their revenue from the same four outlets: Wal-Mart Stores Inc., Toys “R” Us Inc., Target Corp. and Amazon.com Inc., according to data compiled by Bloomberg.

The company "would have too much power over suppliers, retailers and licensors, creating an extremely anti-competitive environment," Johnson said.

Enforcers could look at the combined company’s dominance of shelf space in stores, said John Staszak, who follows Mattel for Argus Research Corp. One concern might be whether the companies could have enhanced negotiating power with retailers, making it more expensive for the big-box stores to stock a bundle of products for their shelves, said Amanda Wait, an antitrust lawyer at Hunton & Williams LLP in Washington.

“There’s a transaction cost issue,” she said. “If I’m Target and I don’t have Mattel, then I have to negotiate individually with four or five other companies to get to the same product line as I would have been able to get to just negotiating with Mattel.”

Toys “R” Us

The FTC filed a complaint against Toys “R” Us in 1996 for conspiring with toy manufacturers to stop selling to warehouse clubs, which means it’s most likely to take a review of the possible tie-up of Hasbro and Mattel, instead of the Justice Department.

According to Jaime Katz, an analyst at Morningstar Investment Service, the combined company wouldn’t be dominant. She said the companies together would account for about $5 billion of the $24 billion U.S. toy market, in which negotiating power has shifted to retailers. That might not be enough to raise concerns among antitrust officials, she said.

Another question is whether the tie-up of two of the top three toymakers in an industry where there are dozens of smaller competitors would raise the same concerns as a deal that leaves only one major player. That scenario prompted the FTC to sue last year to block Staples Inc.’s takeover of Office Depot Inc., which would leave only one national office supply retailer. That case is scheduled to go to trial in March.

Aggressive streak

The antitrust agencies have shown an aggressive streak recently in challenging mergers in concentrated industries, such as the Justice Department’s lawsuit to block Electrolux AB’s purchase of General Electric Co.’s appliance business, which would have allowed Electrolux and Whirlpool to dominate the market for ovens. GE abandoned the sale in December.

“The agencies’ view is the sky is not the limit in terms of merger activity, and when you get down to very few competitors, and those competitors start merging, you’re going to get stepped up enforcement,” said Allen Grunes, an antitrust lawyer at the Konkurrenz Group in Washington.


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