Spin Master to Acquire Melissa & Doug

Acquisition promotes significant growth in preschool category.

Jaime M. Katz, CFA 11 October, 2023 | 2:39PM
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Toys

On Oct. 11, no-moat Spin Master (TOY) announced it will pay US$950 million for Melissa&Doug, a premier brand catering to the infant, toddler, and preschool category focused on eco-friendly inputs and screen-free play. We believe Spin Master has an opportunity to capitalize on the underutilization of the Melissa&Doug brand, elevating the line internationally and expanding into new areas like publishing, providing a solid road map for growth.

However, we remain cautious on the infant, toddler, and preschool industry, given that it has grown at an average annual rate of around 2.5% over the last decade. Even leading brands like Fisher-Price (owned by narrow-moat Mattel) have failed to generate growth in four of the last five years. While this acquisition is considerably larger than Spin Master’s usual tie-ups of less than US$100 million, we don’t foresee any issues that would derail it. The acquisition price represents an 8 times adjusted enterprise value/EBITDA multiple, including synergies, and less than 2 times sales, in line with historical deal levels. The transaction will be financed through US$450 million in existing cash and US$500 million from new debt, leaving Spin Master with less than 1 times net leverage when the transaction closes in 2024 and providing flexibility in the capital structure.

Although Melissa&Doug’s revenue is around 24% of Spin Master’s 2022 sales, we expect the incremental top-line lift to be offset by integration expenses. Indeed, Spin Master expects Melissa&Doug to be accretive to EPS at a midteens rate in 2024 when including run-rate savings (which aren’t set to be achieved until 2026). We expect 2024 profits will be crimped by higher administrative expenses and marketing, distribution, and debt-service costs, although these factors should normalize over time. For now, we expect the tie-up to improve our $50 fair value estimate by around $2-$3. We still view the shares as significantly undervalued.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Spin Master Corp Shs Subord Voting29.67 CAD5.29Rating

About Author

Jaime M. Katz, CFA

Jaime M. Katz, CFA  Jaime Katz, CFA, is a senior equity analyst for Morningstar.

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