Toy Story Gets Engrossing - MattHas In The Offing?

(RTTNews) - It's no child play. The two mammoths of the toy industry are contemplating a merger that could monopolize the industry, if a report that appeared on Bloomberg is to be believed.

On the emergence of the report by the mid-session on Thursday, both stocks spiked sharply only to pull back immediately after and ending with more modest gains of over 1 percent each.

Hasbro reportedly was the proponent, approaching Mattel with a proposal to merge. Both companies have had more than one sitting to discuss a potential combination. The marriage of convenience contemplated, which has been made a necessity due to competition for the toy industry in general, from gadgets, and the two companies in particular, as Europe's Lego emerges as a serious contender, might provide some leeway for both companies to set their houses in order.

Stagnant Growth

Mattel's net sales have been stagnating around $6 billion since 2010 and net income has declined to $369.4 million in 2014 from $684.86 million in 2010. In comparison Hasbro has seen its revenues vacillating in a range around $4 billion. However, prudence in cost management has seen the company grow its net income at least modestly. From $397.75 million in 2010, net income of Hasbro has improved to $415.93 million in 2014. Hasbro is set to report its fourth quarter and full year 2015 results on February 8th.

Hasbro's full year earnings are expected to improve to $3.43 per share in 2015 from $3.15 per share in 2014, while revenues are set to rise 1.60 percent to $4.35 billion.

Firmer Dollar Hits Competitive Appeal

Apart from inherent weakness, the companies are also facing the onslaught of a firmer dollar, which has nicely moved up, as the U.S. Federal Reserve has begun its monetary policy normalization.

Lego Bulldozes

In comparison, Lego, a Danish company, grew its revenues to 28.58 billion DKK in 2014 from 16.01 billion DKK in 2010 and during the period, net profits nearly doubled to 7.02 billion DKK. The plastic construction toys the company sells are preferred by parents as they see educational appeal in them as opposed to the mere gratification provided by the wares of Hasbro and Mattel

Regulatory Block?

There have also been widespread fears that a potential combination between the two U.S. toy makers may not be able to scale the regulatory hurdle- a valid fear, given the clamp downs in the recent past by the Anti-trust officials. However, a point in favor could be the complementary nature of their respective product stable. Hasbro targets boys, while Mattel, with its signature Barbie dolls, caters mainly to the girl's category. Despite all talks of monopolization, analysts opine that a combined company could only have one-fourth share of the retail toy market, which may not flash the red signal for regulators.

About two decades back, Mattel did make an offer for Hasbro only for the latter to come bristling and defending its independence with verve. However, this time around, the combination may be seen as a survival strategy than a bid to sideline the other.