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For Hasbro and Mattel, the timing may be right

Even the longest courting match eventually finds its time, and for Barbie and Transformers, it may be now.

My Little Pony-owner Hasbro made a new acquisition approach to Mattel, after the two had made at least two prior attempts at a deal. A tie-up would give the two scale to compete to compete in an increasingly challenged toy industry.

Mattel and Hasbro could not be immediately reached for comment.

Toymakers have been under pressure for years from cheaper off-shore imports, margin-squeezing big-box retailers and children who increasingly prefer tablets to toys.

The bankruptcy of Toys R Us, one of the world's largest toy retailers, threw a wrench into the industry. According to Jefferies, the retailer comprised 11 percent, 9 percent and 15 percent of 2016 global sales for Mattel, Hasbro and Jakks Pacific respectively.

The disruption of its filing had a huge impact on Mattel and slightly less so on Hasbro. In North America, where Toys R Us filed for bankruptcy, Mattel's net sales this most recent quarter dropped by 22 percent. Amid its challenges, Mattel suspended its quarterly dividend.

Toys R Us is expected to emerge from bankruptcy, but will likely eventually have a smaller footprint. That means fewer stores in which to sell exclusive toys that Mattel and Hasbro make for the retailer. With potential store closings also comes potential liquidation sales that sell their toys at rock-bottom prices.

Mattel has watched its stock drop nearly 60 percent over the past five years, while Hasbro's has nearly tripled.

Mattel has had harder a time staying current with changing trends. It lost the Frozen toy license agreement to Hasbro. One of its core products, Barbie, is no longer in favor with today's youth.

Hasbro, meanwhile, has helped leverage its toy business into the media world, largely through its Hasbro studios business. The production company makes TV and movies that center on Hasbro characters like My Little Pony.

Mattel's woes may be Hasbro's gain. One of the previous points of contention between the two was who the surviving party would be in a potential deal. With Hasbro's market capitalization at $12.12 billion compared to Mattel's $6 billion, the answer to that question is far more clear.

Southeastern Asset Management reported in late October a 10.2 percent passive state in Mattel. While still passive, SEAM could agitate at any point for a sale if it wants. It could also nudge from behind the scenes, even if not as a formal activist.

And if SEAM or Hasbro wanted to nominate directors for Mattel's board ahead of the company's annual general meeting in 2018, it has until Dec. 6 to do so.

The very players challenging Mattel and Hasbro may make a deal more likely. In the past, Mattel and Hasbro have disagreed over the antitrust risks of the two combining. With the two facing greater rivalry in the entertainment realm from technology like iPads, though, they could argue there is more industry competition than several years ago. The antitrust risk of them combining would thus be less.


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