Apax misses with HIT disposal

October 24, 2011

By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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.

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