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Sunday, 23 November 2014

Character building

Apax misses with HIT disposal

Mattel’s $680 million purchase of HIT Entertainment, the company behind kids’ characters Bob the Builder and Thomas the Tank Engine, brings a sorry tale of private equity ownership to a close. But uniting Bob with Barbie does not necessarily mean they’ll live happily ever after.

With HIT, Apax Partners seems to have fallen short as a builder of businesses and a financial engineer. HIT is worth less, and enjoys lower revenues, than at its 2005 buyout. Sales were 148 million pounds in financial 2004, its last year as a public company, or about $236 million at current exchange rates. Now they stand at about $180 million. The current deal values HIT at about 60 million pounds less than in 2005 - although HIT’s stake in a TV channel is still to be sold, which could help narrow that gap.

In 2005, with the buyout boom in full swing, Apax over paid. It went in at 14.6 times historic EBITDA, versus an exit at 9.5 times. It also put too much debt on the business, forcing it into negotiations with lenders last year. Strategically it misfired too, dabbling with in-house toy-making, and probably overestimating the potential for Bob, whose star was already waning. Newer shows, like Rubbadubbers, sunk sadly into obscurity. DVD sales, a key revenue source, are also under pressure.

From Mattel’s point of view, the price tag looks more palatable. Japanese rival Tomy paid 11 times historic EBITDA for U.S. toymaker RC2 earlier this year, for example. There is also strategic logic for the new combination. Mattel already makes the non-wooden toys for Thomas & Friends, by far HIT’s strongest set of characters. Moreover, its clout with big retailers like Wal-Mart should ensure toys based on HIT characters get better shelf space.

But it’s not without risks. Mattel is a company that has forged its reputation making toys. HIT’s skill lies in creating characters, making shows and licensing products. Judging kids’ tastes is as much an art as a science. Synergies between the two, meanwhile, look thin. It is too early to write the fairytale ending.

Context News

Mattel, the U.S. toy company, has agreed to buy HIT Entertainment for $680 million in cash from a consortium led by Apax Partners funds.

Apax bought HIT, which owns a portfolio of preschool brands including Thomas & Friends, Barney, Bob the Builder, Fireman Sam and Angelina Ballerina, for 489.4 million pounds in 2005.

Media reports early this year had suggested Apax was hoping the company could fetch $1 billion or more. In 2010, British media reported that HIT had struck an “amend and extend” debt-restructuring deal with its lenders.

Mattel already sells Thomas & Friends die-cast and plastic toys worth more than $150 million a year under a license from HIT. It plans to make wooden Thomas the Tank Engine toys from 2013, after the current license expires.

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