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Analysts expect potential toy industry consolidation after Toys R Us liquidation

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Analysts expect potential toy industry consolidation after Toys R Us liquidation

The toy industry is ripe for potential consolidation as the leading U.S. toy makers – Hasbro Inc. and Mattel Inc. – will be well-placed to pick up small toy brands at bargain rates after the Toys R Us Inc. liquidation, analysts told S&P Global Market Intelligence.

Toys R Us, which filed for Chapter 11 bankruptcy protection in September 2017, said March 14 that it will begin to wind down its U.S. business, including the sale or closure of all 735 stores in the U.S. market. The liquidation follows a tough holiday season for the retailer. Toys R Us said in a March 15 bankruptcy filing that its sales during the critical holiday season faltered, as consumers feared their gift cards would not be honored and stores would go out of business. The company reported a net loss for the fiscal third quarter ended Oct. 28.

This will change the landscape for toy makers, analysts told S&P Global Market Intelligence. With Toys R Us out of business, small toy makers like Spin Master Corp., Jakks Pacific Inc. and Funko Inc. likely face an uphill battle for shelf space at other retailers, making them easy targets for larger companies such as Hasbro and Mattel to acquire.

Hasbro and Mattel declined to comment for this story. Spin Master, Jakks Pacific and Funko did not immediately respond to requests for comment.

Hasbro and Mattel will likely weather the Toys R Us liquidation, despite being among Toys R Us' largest unsecured creditors, said Jim Silver, CEO and editor-in-chief of toy trade publication TTPM.com, in an interview. Both companies have had success translating their brands to e-commerce and selling on Amazon.com Inc., as well as through general merchandisers like Walmart Inc. and Target Corp., he said.

Mattel, the maker of Barbie, Fisher-Price toys and Hot Wheels, was owed $135.6 million at the time of Toys R Us' bankruptcy filing. Hasbro, which makes G.I. Joe figurines and board games such as Monopoly, was owed $59.1 million.

Hasbro and its subsidiaries had cash and cash equivalents of $1.58 billion according to the company's 10-K filed Feb. 26. Mattel had cash and equivalents of $1.08 billion according to its 10-K filed Feb. 27.

The smaller players that rely more heavily on Toys R Us are most vulnerable, Silver said.

"I see a lot of acquisitions happening this year where larger companies are picking up stronger brands because those smaller brands are so stressed," he said. "It's an opportunity for a Hasbro or Mattel to get stronger."

Toys R Us has previously been a platform for small brands to prove they can resonate with consumers, then move to the shelves of larger retailers or online, Gerrick Johnson, an analyst at BMO Capital Markets, said in an interview.

"It gave smaller toy companies and lesser-known brands an opportunity to be discovered and break out," he said. "Without it, smaller toy companies will be hard-pressed to get some of their toy lines into the remaining mass-market retailers who only carry the top few brands."

Hasbro and Mattel are less exposed to Toys R Us than other toy companies, including Spin Master, Johnson said. Spin Master's exposure to Toys R Us stands at 16%, according to BMO Capital Market's research, compared to about 10% for Hasbro and Mattel.

Linda Bolton Weiser, an analyst at D.A. Davidson, said in an interview that the Toys R Us liquidation could pitch Hasbro and Mattel, which were reportedly in merger talks in November 2017, into competition as small toy manufacturers are suddenly affordable for both of them.

"Toys R Us was the one who carried every toy, and if you're a small brand, you might have gotten on the shelf there," she said. "What it means is, we're looking at a way more consolidated toy manufacturer base. It certainly changes the landscape."