Mattel’s $680-million (U.S.) 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 in financial 2004, its last year as a public company, or about $236-million (U.S.) at current exchange rates. Now they stand at about $180-million. The current deal values HIT at about £60-million 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 overpaid. It went in at 14.6 times historic EBITDA (earnings before interest, taxes, depreciation and amortization), 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, such as Rubbadubbers, sank 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. toy maker 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 fairy tale ending.