Mattel's Myst opportunity
Toy maker buying Learning Co. for $3.8B, lowers 1998 earnings estimate
NEW YORK (CNNfn) - Mattel Inc. is employing the derring-do of Carmen Sandiego and other Learning Co. software characters to help overcome its problems in toyland.
Hawthorne, Calif.-based Mattel, the nation's largest toy maker, said Monday it is acquiring The Learning Co., a leading educational software publisher, for about $3.8 billion.
Mattel stock closed Monday at 22, down 8-1/8 or 27 percent. Learning Co. stock closed down 3-5/16 at 25.
Under terms of the stock-swap transaction, Learning Co. holders will receive $33 worth of Mattel stock for every share they hold. The actual price is contingent on the average stock price for a 20-day period ending five days before the transaction closes.
The deal was announced at the same time that Mattel indicated its earnings for the year will be 33 percent below prior estimates, at about $1.20 a share, before the charge being taken for the recall of many of its Fisher-Price Power Wheels vehicles.
Mattel said sales for the year will be flat with those of 1997, despite signs of strong holiday sales. The primary reason is the shift in inventory practices initiated earlier this year by Toys "R" Us, the nation's single largest toy retailer, which delayed orders of new toys until the second half of the year in order to better anticipate which toys would be in demand.
"Although we had a strong Thanksgiving, up 23 percent at our top five U.S. accounts, retailers have determined that they would rather drastically reduce their inventory levels than capture incremental sales," said Mattel chairwoman and chief executive Jill E. Barad. "This has negatively impacted our sales by approximately $350 million this year."
Barad said Mattel is responding to the shift in ordering by a shift in shipping, which means that some toys that would have been sent to stores in December won't go until the first half of 1999. That, she added, will reduce sales for 1998 by another $150 million.
The Mattel chairwoman said the company couldn't adjust its spending fast enough to prevent a slippage in 1998 earnings.
"These developments were counter to all historical trends, and could not have been foreseen," Barad said. "This situation is very painful and disappointing for us."
Barad said she is encouraged by the fact that December inventories are their lowest ever, down 30 percent from 1997. "In fact, Toys 'R' Us, which had the largest amount of inventory coming into the year in the U.S., has reduced its inventory of Mattel products by more than 50 percent," said Barad. "This overall inventory reduction will give us a clean start at all of our accounts in 1999."
One of the ways Mattel has responded to the peaks and valleys in the toy business is to make a push into software. Its programs based on Barbie, the product most associated with the company, have been the first successful CD-ROMs targeted specifically to preteen girls.
Another effort by Mattel to avoid the ups and downs of retailers may come through direct marketing of products. That was one motivating factor in the company's purchase in June of Pleasant Co., the maker of the American Girls doll series, which has sold the bulk of its products through direct marketing.
Besides the popular Carmen Sandiego software -- which was part of its acquisition of Broderbund Software earlier this year - Learning Co.'s brands include the Reader Rabbit line of early learning software, the Oregon Trail history programs for preteens, and two of the best-selling adventure games of all time, Myst and Riven.
Among the popular kids' characters being brought into the Mattel fold by the deal are Arthur, Madeline and the characters of Dr. Seuss and Sesame Street.