mattel inc.’s acquisition of mega brands inc · mattel inc.acquires mega brands inc. 4 | page...

MergersandAcquisitions–SGMT6050

MATTELINC.’SACQUISITIONOFMEGABRANDSINC.AnAnalysis

PreparedFor:

DavidConklin

PreparedBy:

CC

SN

VT

BorisFucic

July8,2014.

MATTELINC.ACQUIRESMEGABRANDSINC.

2|P a g e MergersandAcquisitions–SGMT6050

CONTENTSMattelInc.’sAcquisitionofMEGABrandsInc................................................................................1Mattel.........................................................................................................................................4

BusinessStrategy...................................................................................................................6

Mattel:Strengths–Weaknesses–Opportunities–Threats.................................................6

MEGABrands.............................................................................................................................8

BusinessStrategy...................................................................................................................9

MEGABrands:Strengths–Weaknesses–Opportunities–Threats......................................9

IndustryAnalysis-ToyIndustry...............................................................................................12

AlternativestotheMerger.......................................................................................................13

TheDeal...................................................................................................................................15

ConstructionToysCategory.................................................................................................16

Non-TraditionalToys............................................................................................................16

LicensingRelationships........................................................................................................17

MEGABrandstoLeverageMattelScale...............................................................................17

ProductioninNorthAmerica...............................................................................................18

PotentialObstaclestotheAcquisition.................................................................................18

Valuation..............................................................................................................................19

SharePrice............................................................................................................................21

CriticalMilestones................................................................................................................22

RisksandRockyPlaces.............................................................................................................23

IntegrationAptitude.............................................................................................................23

IndustryConsolidation.........................................................................................................23

SustainabilityinToyManufacturing.....................................................................................23



IntegrationIssues.................................................................................................................24

Appendices...................................................................................................................................25Appendix1:Porter’sValueChain.............................................................................................25

PrimaryActivities.................................................................................................................25

SupportActivities.................................................................................................................26

Appendix2:SWOTStrategiesMattel.......................................................................................28

Appendix3:SWOTStrategiesMEGABrands............................................................................29

Appendix4:FiveForcesAnalysis..............................................................................................30

BargainingPowerofSuppliers(MEDIUM)...........................................................................30

BargainingPowerofCustomers(MEDIUM).........................................................................31

ThreatofNewEntrants(LOW).............................................................................................32

ThreatofSubstitutes(MEDIUM->Growing).......................................................................33

ExistingCompetitiveRivalry(MEDIUM)...............................................................................35

Appendix5:PESTLEAnalysisoftheToyIndustry.....................................................................37

Appendix6:ComparableCompanyAnalysis............................................................................40

Appendix7:DiscountedCashFlowMethod............................................................................41

Appendix8:MEGABrandsWACC............................................................................................42

Appendix9:PotentialValueofSynergies................................................................................42

Appendix10:StockPerformance.............................................................................................43

Bibliography.................................................................................................................................44



OnFebruary28th,2014,MattelannouncedafriendlyacquisitionofMEGABrands,adealwhich

wascompletedonApril30th,2014.MEGABrandsshareholdersreceived$17.75CDNpershare

incash,equivalenttoa32%premiumtotheweightedaveragestockpriceinthemonthleading

tothemerger.Thetransactionrepresentedatotalvalueof$460millionUS,includingthedebt

ofMEGABrandstobeassumedorrepaidbyMattel.(CanadianPlasticsJournal,2014).

MEGA Brands acquisition was the best alternative for Mattel to advance its global growth

strategy of building upon its world class portfolio of brands. The acquisition will create

significantgrowthopportunitiesforMattelasitwillallowthecompanytoexpandintotwoof

the fastest-growing toy categories: constructionbuilding sets andarts& crafts.MegaBrands

givesMattelthemanufacturinganddesignknow-howintheconstruction-toycategorytobuild

asolidplatformtocompeteagainstLEGOandprotectitsNo.1positioninthemarket.

Furthermore, theacquisitionwill unlockanumberof synergiesbetween the two companies.

MattelwillbeabletocapitalizeonexistingMEGABrandslicensesandbroadenitsrelationship

with entertainment partners. Through the acquisition, Mattel will also have a tremendous

opportunitytoreturnsomekeymanufacturingbacktoNorthAmericaandmitigatesomeofthe

risk associatedwithproduction inChina. Themerged company could also see an increase in

efficienciesintheirdistributionandpurchasingcapabilities.

Notsurprisingly,atotalof99.96percentofMegaBrandsshareholdersapprovedthedeal,and

both companies’ share price increased after the official announcement, reflecting market

confidenceonthesignificantvaluethisacquisitionwillbringforMattelintheupcomingfuture.

MATTELMatteldesigns,manufacturersandmarketsabroadvarietyof toyproductsworldwidewhich

aresoldtoretailers,distributorsanddirectlytoconsumers(Mattel,2013).In2012,Mattelwas

thelargesttoymanufacturerintheworldfocusingonthetraditionaltoysandgamescategories

(Euromonitor,2013).



Mattel sells their products in 150 countries and controls 17% of the US market. Its biggest

competitorsareHasbroandLego.Hasbro’sexpertiseisintheactionfigures,puzzlesandother

educational games. They aremostly known for games such asMonopoly and Transformers.

PartofHasbro’sstrategy istoexpand intothedigitalspaceworldandcompeteagainstother

computerorvideogameproducers.Legoontheotherhand, istheleader intheconstruction

setscategorymostlyknownforLegoBricksthatappealtoallagegroupsanditsstrategyisto

expandintoemergingmarkets.Legocurrentlycontrols75%oftheUSmarket.

Mattel’s product portfolio includes well-known brands such as, Barbie, Hot Wheels, Fisher

Price,DisneyCars,andMattyCollector.

Mattel has sales and marketing offices and facilities in 36 countries, its manufacturing

operations are located mainly in China but the company also operates plants in India,

Indonesia,Italy,Malaysia,MexicoandThailand.Thevarietyoflocationshelpsthecompanyto

preventriskfromanycountry’spotentialinternalproblems(Euromonitor,2013).

Additionally,inordertofurtherreducecostsandrisk,Mattelusescompany-ownedfacilitiesfor

theproductionofmostofitscoreproductsandthird-partymanufacturersfortheproductionof

other non-core brands. Approximately half ofMattel's products aremanufactured in one of

nineowned factories: four inChina, two inMexico andoneeach inMalaysia, Indonesia and

Thailand.Theother50%oftheirproductsareproducedbyvendorspredominantly located in

SouthernChina(Euromonitor,2013).PleaserefertoAppendix1 foradetailedanalysisof the

activitiesacrossthevaluechain.

Matteloutlinedthefollowinghigh-levelobjectivesintheirmostrecentannualreportfor2013:

Mattel’svisionis“creatingthefutureofplay”.Mattel’sobjectivesare:

• Togrowitsshareinthemarketplace,

• Continuetoimproveitsoperatingmargins,and



• Createlong-termstockholdervalue”(Mattel,2013)

BUSINESSSTRATEGYMattel also outlined the following strategies that will help them achieve their long-term

objectives:

• GlobalGrowthStrategy:“todeliverconsistentgrowthbycontinuingthemomentumin

its core brands, optimizing entertainment partnerships, building new franchises, and

workingtoexpandandleverageitsinternationalfootprint.”(Mattel,2013)

• “Optimize operating margins through sustaining gross margins within the low-to-mid

50%rangeinthenear-term,above50%inthelong-term,anddeliveringoncostsavings

initiatives.”(Mattel,2013)

• Cash Flow and Value Enhancing: “Continue its disciplined, opportunistic, and value

enhancingdeployment.”(Mattel,2013)

MATTEL:STRENGTHS–WEAKNESSES–OPPORTUNITIES–THREATS

Strengths

Mattelgainsacompetitiveadvantagethroughitsglobalbrandawarenessandthemanyiconic

brands within its product portfolio. Moreover, Mattel also benefits from its licensing

agreementswithDisneythatallowsthemtouseDisneycharactersfortheirrecognitionvalue.

Additionally, theirmainmanufacturing facilities are located inmajor areas of growth,which

works toallowsMattel theability toenter thesenewmarkets relativelyeasily.Mattel isalso

oneofthetopretailersintheindustrywhichallowsthemtoutilizetheireconomiesofscaleand

enables them to utilize their collaborative powerswith their competitors tomaintain prices,

andnegotiatelowercostsfromsuppliers.

Weaknesses

In comparison to its competitors,Mattel doesnot have a focusoneducational, eco-friendly,

andtechnology-basedentertainmentproducts.Basedontheirexistingstrategy,itappearsthat

there is amajor gapbetweenwhatMattel is capableofproducingandwhat their long-term

visionistargetedat.Thisisinpartduetounderutilizationofitsintellectualpropertyresources.

Furthermore, over the past several yearsMattel has implemented a Global Cost Leadership

program, which focuses on cost savings through optimizations in their value chain. This



initiative has placed them at a higher risk of sacrificing product quality and damaging their

brandas ithasfocusedoncontrollingcostsasopposedtodrivingproductsafetyorrenewing

consumerpreferences.

Opportunities

Dueto itsbrandpowerandnamerecognition,Mattel isable to formstrongpartnerships for

entering lifestyle, entertainment, clothing, gaming markets, and catering to a wider

demographicintermsofage.Mattelcanalsoleverageitsglobalpresencetomaximizeearnings,

andhedgeforeignexchange,political,orsocio-economicrisks.

Threats

Consumers’disposableincomehasfallensignificantlyinrecentyearsleadinganalyststopredict

growth in low-end or alternative products. Mattel’s costs are also likely to increase due to

complianceandcross-culturalmarketingstrategiesasitcontinuestoexpandglobally.

StrengthsandOpportunitiesStrategies

• Mattelhasastrong financialpositionwhichallowsthemtoenter theelectronicgame

marketeitherthroughanacquisitionororganically,

• Mattelcanleverageexistingbrandsandextendintoothersub-brandsinareassuchas

entertainment,clothing,

• Utilize itsglobalsupplyandmanufacturingbasetomitigateriskofcurrencyexchange,

politicalandsocio-economicrisks,

• Mattelcanextendintootherproductlinesbyanacquisitionand/orlicensing.

StrengthsandThreatsStrategies

• Utilizeassetstoexpandintoantherproductlinestobetterpositionagainstcompetitors

(i.e.electronicgaming),

• Imposestringentqualitycontrolstandardsonmanufacturingsuppliers,

• Leverageforeignearningstohedgeagainstcurrencyfluctuations.

WeaknessandOpportunitiesStrategies

• Continuetodevelopproductstolimitexposuretothird-partycontent,



• Leverage to enter into new market segments, such as lifestyle, entertainment,

constructionsettoys,

• Developproductstargetedatolderagegroupstoexpandmarketpresence.

WeaknessandThreatsStrategies

• Mattelmaylicenseitsintellectualpropertytoothersforfastermarketpenetration,

• Entergamingsegmenttargetedat18–35yearolds,

• Acquire online gaming/electronic entertainment company to reduce dependency on

manufacturing.

PleaserefertoAppendix2forfurtherinformation.

MEGABRANDSMEGA Brands is a Montréal Based organization that specializes in toy design and

manufacturing.Thecompanyiswell-knownforconstructionsettoysandisrecognizedfortop-

of-the-linemanufacturingpractices.Itstwomainlinesofproductsincludechildren’stoysand

stationary products. The company has manufacturing facilities in over 17 countries with a

product presence in over 100 internationalmarkets. Its toys segment includesMEGA BLOKS

andMEGA PUZZLESwhile its stationary& activities segment is comprised of brands such as

ROSEART,BOARDDUDES,andWRITEDUDES.

Thecompany’sfocus isonquality,price,playexperience,marketinganddistribution,andthe

acquisitionofretailshelfspace.Itcreatesoperationalefficiencybymanagingitssupplychainto

createanoptimalbalancebetweenin-houseandthird-partymanufacturing.Itaimstoinvest3-

4%ofnet sales in researchanddevelopmentas innovation is a key growthdriver in the toy

industry. Currently, North America accounts for 70% of the company’s sales although the

companycontinuestoexpanditsinternationalpresence(MEGABrandsInc.,2014).Itsmission

isto“nurturecreativityineverychildandeveryfamily”(MEGABrandsInc.,2012)



BUSINESSSTRATEGYThestrategiesofMEGABrandsare(MEGABrandsInc.,2014):

• Develop innovative products based on proprietary content and licensing agreements

withpopularbrands.

• Manufactureandsourcehighqualityproductsonacompetitivebasis.

• Marketproductstoleadingretailersandconsumersworldwide.

MEGABRANDS:STRENGTHS–WEAKNESSES–OPPORTUNITIES–THREATS

Strengths

MEGA Brands has a relatively strong brand presence in western markets. Its strong

relationshipswith companies such as CartoonNetwork, Nickelodeon, and Viacom Consumer

ProductsallowsittosecureaccesstoproductseriessuchasGeneratorRex,Doratheexplorer

andGo,Diego,Go!ItalsohasalicensingpactwithMarvelforSpiderman,theHulk,Bladeand

X-Men(Hoovers,2013).

MEGABrandshasasignificantmarketshare intheCanadianmarket,accountingfor60.2%of

Toy,Doll&GameManufacturingsegmentof theCanadianmarket (Haider,Toy,Doll&Game

ManufacturinginCanada,2014).Ithasmanufacturingoperationsacrosstheworld,buthasalso

recentlymade an effort to on-shoremolding operations (Stephen, 2013). The company also

owns a portfolio of brands that can easily be expanded into other parts of theworld, other

classes of product and other non-toy areas. Its diversified productmix includes construction

toys, puzzles, stationery and activity related products such as arts and crafts tools (RoseArt

Group),presentationboards,andwritinginstruments(Stephen,2013).Thecompanyalsotakes

advantage of technologies such as 3D design to create unique products and help facilitate

around-the-clock design (Sensable 3D Design, 2010). Having a flexible and fast design team

wouldallowthecompanytocapitalizeonchanges inconsumerdemand,akeysuccessfactor

fortheindustry(Haider,2014).



MEGABrandsalsohashadstrongperformancerelativetoindustrypeers,havingoutperformed

Mattel and Hasbro for five straight quarters leading into the first quarter of 2013 (Stephen,

2013).

Weaknesses

MEGA Brands has experienced extremely volatile performance in the last 5 years of its

operations. It also had to deal with losses due to product recalls relating to its Magnetix

products, which impacted its brand reputation (Infomart, 2014). The company’s geographic

diversification is heavily concentrated in North America, mostly in Canada. Its operations in

Europeandotherareasoftheworldarejuststartingtotakehold.(Hoovers)

Opportunities

MEGABrands iskeyplayer intheconstructionsettoysegmentoneofthefewtraditionaltoy

segments that is growingyear-over-year. Thispresents the companywith theopportunity to

capitalizeontheirpresenceinthismarketandcontinuetoincreasetheirmarketshare.MEGA

Brandspossessestherightstomanufactureandsellnumeroustitlesthatgobeyondthecore

children’smarket(Haider,Toy,Doll&GameManufacturinginCanada,2014). Thisprovidesa

uniqueopportunitytoMEGABrandsastheagerangewithinwhichitcompetesisbroaderthan

most other toy manufacturers. Complying with government regulations is critical in this

industryandbecomingincreasinglycomplex.Itisexpectedthatlargercompanieswillbemore

adeptatmaneuveringthroughthecomplexitiesoftheregulatoryframework(Haider,Toy,Doll

& Game Manufacturing in Canada, 2014). Being a well-established company with great

governmentrelationsallowsMEGABrandsmoreopportunitiesforgrowthandexpansionthan

moretraditionalsmallerorganizations.

Threats

Thecompanycompetesinaglobalandheavilyconcentratedindustrywithequallyhighlevelsof

competition. This is also reflected in the fact that retailers have a tremendous amount of

strength to dictate elements such as delivery times and have a significant control on shelf

space. The industry participants are heavily reliant on export activity and are subject to

economic conditions. Industry drivers include the Consumer Confidence Index, consumer



spending, per capita disposable income, demand from hobby and toy stores, exchange rate

fluctuations, and leisure time (Haider, Toy, Doll & Game Manufacturing in Canada, 2014).

Industryrevenuehasdroppedsignificantlysince2006buthasstartedtorecoverinrecentyears

(Haider, Toy, Doll & Game Manufacturing in Canada, 2014). The industry is expected to

continuetohavedifficultieswithgrowthoverthecomingyears.Itiscommonlyexpectedthat

toyswillcontinuetobecomemoreandmoresegmentedwithrevenuegrowthbecomingslower

thantheremainderoftheeconomy(Haider,Toy,Doll&GameManufacturinginCanada,2014).

StrengthsandOpportunitiesStrategies

• MEGA Brands can utilize its international presence and brand awareness to increase

marketingandfurtherexpanditsinternationalfootprint,

• The use of new technology such as 3D design can allow the company to create

innovativeproductsthatcangobeyondthecorechildren’smarket,

• Stronglicensingagreementsandrelationshipswithcompaniescanbeexpandedtobring

inadditionaltitles.

StrengthsandThreatsStrategies

• The slow growth in the toy industry means innovation is vital. The company should

increaseitsinvestmentinresearchanddevelopmenttocontinuedevelopingproprietary

content,

• Useglobalsupplychaintominimizecostsandcreatedistributionefficiency

WeaknessandOpportunitiesStrategies

• Investinginvirtualtoyshelpsfurtherdiversifyproductsandcatertodemand,

• Developproductstargetedatolderagegroupstoexpandmarketpresence.

WeaknessandThreatsStrategies

• Imposestringentqualitycontrolstandardsonmanufacturingsuppliers,

• Optimized supply chain and proprietary products delivered on time can help obtain

preferredshelfspacewithretailers.

PleaserefertoAppendix3forfurtherinformation



INDUSTRYANALYSIS-TOYINDUSTRY

A PESTLE analysis was utilized to identify relevant trends in the Toy Industry over the next

severalyears.PleaserefertoAppendix2forfurtherinformation.

EconomicFactors

Emergingmarkets’economicdevelopmentandtheemergentmiddleclassmaydrive industry

growth in the next few years: Eastern Europe and Latin America were the fastest growing

regions globally in traditional toys and games in 2012, both recording double-digit value

growth. Asia Pacific is expected to become the biggest traditional toymarket over the next

severalyears(Euromonitor,2013).

TheConstructioncategoryoutperformedoveralltraditionaltoysandgamesbya largemargin

globallywithandannualgrowthrateof15%in2012upfrom14%theyearbefore.Allmarkets

sawan increase in sales, attributable to LEGOwhohas adominantposition in this category,

accountingformorethan62%ofglobalvaluesalesin2012(Euromonitor,2013).

Consideringthatthreequartersoftheworld´stoysaremadeinChina,thecountry’sshrinking

labor market and rising raw material costs may negatively impact many major players’

operationsinthetoyindustry.

SocialandCulturalFactors

Construction toys have become popular among parents seeking to limit the amount of time

their children spend using iPads and other electronicswith screens. Parents are increasingly

looking for products that can stimulate a child’s imagination and creativity. The number of

householdswhere fathers stayathomeandmakemostof the familypurchases is increasing

which has also driven an increase in preference for educative and construction toys

(Euromonitor,2013).



Children's television viewing habits and the popularity of films will continue to strongly

determine children´spreferences and consequently industrydynamics.Other relevant trends

thatwill impact the industry include: “Age compression phenomenon” (increasing children´s

preferencesforsmartphonesandvideogamesaftertheageof10),andthegrowingolderkid´s

preferencefortoysandgamesinvolvingsocializingactivities.

TechnologicalFactors

Key technological trends include the development of new inexpensive technologies and

emerging tablet toys and games on Apple and Android devices, increasing penetration of

electronicsanddigitalelementsintotraditionaltoys,developmentofappstobeusedastoysor

accessories/complements for traditional toys and toys / games cross-overs (cross-industry

collaborationbetweentraditionaltoys,videogamesandelectronics).

LegalFactors

Key trends towatch include: Import regulations, especially fromChinawhichmaynegatively

impactexpansionplans inemergingmarkets.Globalizationof licenses isexpectedto increase

licensors’ power over licensees and increased product safety regulations are expected to

emergeasaconsequenceofthehighlevelofoutsourcingandoffshoring

EnvironmentalFactors

Eco-friendly toys are emerging as a relevant trend in the industry. In addition, demand for

greater environmental sustainability of products is increasing not only from legislators and

NGOs,butalsofromretailerswhoarereactingtocustomerdemand.

PleaserefertoAppendix4andAppendix5forfurtherinformation.

ALTERNATIVESTOTHEMERGER

AlternativeAcquisitiontoStrengthenMattel’sGlobalPosition

The acquisition ofMEGABrands is an attempt to better positionMattel to compete against

LEGO; however,MEGA Brandsmay not be the best alternative to strengthen its position in

marketswhereLEGOcurrentlyleads.



Seventy percent of total MEGA Brands’ global net sales come from North America (MEGA

Brands,2013),whichmeanstheacquisitionwouldhaveasignificant impactonthis regionas

the combined company will benefit from the full force of Mattel’s marketing logistics and

operationalinfrastructureinthismarket.Mattelhowever,alreadycontrolsmorethanafifthof

thetoymarketinLatinandNorthAmerica,andMEGABrands’limitedinternationalpresencein

keystrategicmarketssuchasAsiaPacificandEasternEuropeunderminesthegrowthpotential

behindthisacquisition.

Alternatively, withmost of the global forecast revenue expected to come from Asia Pacific,

Mattelcouldconsideracquisitions inthismarketwhichwouldguaranteeastrongfoothold in

the fastest growing markets and would give Mattel a competitive advantage against LEGO

whose dominance is still weak in this region. In China, Takara Tomy and Bandai Namco

accounted for 8% and 7% of traditional toys and games sales in 2012 respectively; both

companiesdeservesomeattentionastheymayofferpotentialgrowthopportunitiesforMattel

inthefuture(Euromonitor,2014).

AcquisitiontoStrengthenMattel’sPositioninAlternativeGrowingSegment

TheacquisitionofMEGABrandswouldprovideMattelwithagrowthplatformbybringingnew

productstoMattel’scurrentofferingsandcomingtoylineup.However,LEGO’sexpertiseand

soliddominantpositioninthiscategorycouldjeopardizetheintendedgrowththatisexpected

tobeachievedthroughthisacquisition.

Further,themarketforconstructiontoys isshowingsignsofslowingasnewentrantssuchas

Hasbro have also entered the market. LEGO has also stated it expects global demand for

buildingblockstobemoderatethisyear(Ziobro,2014).

Mattel could consider acquisitions of companies with a strong dominance in alternative or

complementarygrowingcategoriessuchasdigitalgaming.In2013,digitalgamingremainsone



of thebestperformingcategories,posting12%valuegrowthdueto therisingpenetrationof

smartphonesandtablets,aswellasnewgamelaunches(Euromonitor,2013).Anacquisitionin

thiscategorycouldhelpMatteltobuildnewcharactersandbrandrecognitionandthereforeit

couldoffergreatergrowthpotentialinthelongterm.

ConstructionLineDevelopment(In-houseorThroughJointVenture)

The acquisition of MEGA Brands was mainly driven by Mattel’s interest in the growing

construction category. Leveraging its internal capabilities and their well-recognized brands,

Mattel could consider developing a construction line on its own or it could find a strategic

partner able to provide the manufacturing and design know-how that Mattel lacks in this

segment. Although this alternative may be feasible, it would take much more time to

implementanditwouldinvolvemuchmorecomplexitythananacquisition.

THEDEALIntoday’sdayandagemanykidsaresurroundedbyavarietyofelectronicgames,suchasvideo

consoles,TVgames,computergames,allmarketconditionsthatmakeithardfortraditionaltoy

manufacturers such asMattel to compete.Many companies such asMattel andHasbro not

only depend on their toy sales but are also increasingly dependent on revenue from their

licensing relationships with movie production companies such as Disney, Pixar etc…

Additionally, toy companies continue to look to ventures into the virtual realm, which hold

tremendouspotentialas they look foralternatesourcesof revenue. Couple these factswith

increasedpressuresfromotherindustryparticipantsandmoreinterestinsustainablesolutions

formanufacturingandshipping,anditbecomesapparentthatthetoyindustryisinastateof

flux.

AnacquisitionbetweenMattelandMEGABrandswouldunlockanumberofsynergiesbetween

thetwocompaniesinbothtraditionalcategoriesaswellassomeofthemorerecentsegments

inwhichtoymanufacturersplay.ThisacquisitionplaysintoseveralareasofMattel’sstrategic



plan, and we will focus on how each is furthered by havingMEGA Brands in their product

portfolio.

CONSTRUCTIONTOYSCATEGORYIn the traditional toy category, theMEGA Brands’ portfolio consists of arts and crafts toys,

puzzlesandconstructionssets.ItsmostpopularproductisMEGABlokswhichareconstruction

setswith various target audiences. In this category,MEGA Brands competes directly against

LEGOanddespitebeingpresentin17countries,MEGABrandsonlyhasapproximately10%of

themarketshare(EBSCOHost). Eventhoughthis isproportionatelysmall, it isstill leaps-and-

boundsabovewhereMattelcurrentlysits. Despitebeingoneofthelargesttoycompaniesin

theworld,Mattelhasnotbeenabletobreakintotheconstructionsetscategory.Thismerger

willallowthemtoobtainanimmediatefootholdintoamarkettheyhaven’tbeensuccessfulin.

Furthertothis,inrecentyearsMattelhasbeenunderattackinthetoycategoryitdominates,

girl-oriented toys. The LEGO Group has beenmost aggressive with their LEGO Friends and

Duplolines.MEGABrandshasthepotentialtoactasadefensemeasureagainstfurtherLEGO

intrusions.(Wilkinson,2014)

Additionally,Mattel’sproductsaremostlytargetedtowardsyoungerchildrenundertheageof

10,whereasHasbroandLegoproductsareforallagegroups.Thislimitsitsreachfromawider

audience.On theotherhand,MEGABrandsproductsare targeted towardsawideraudience

andhence,Mattelwouldbeabletobenefitfromitasitcanreachthisbroaderaudience.

NON-TRADITIONALTOYSForMattel,theMEGABrandsacquisitionwillextenditsreachintonewandgrowingcategories

that include online gaming related categories. MEGA Brands has numerous license

arrangements for toys targeted at boys including - Halo, Call of Duty, and Assassin’s Creed.

(Wilkinson,2014)ThiswillbringnewopportunitiestoMattel,acompanythathasnothadthe

successitwaslookingforstayingwithnewertrendsandrecognizingtheshiftingdemographics.

MEGABrandshasnumerousfranchiseagreementsthatshouldtranslatewellintofuturegrowth



opportunitiesandan increasingshareoftheolder,“tween”andearlyteenmarketsegments.

Thisisaclearsynergyopportunityforthetwocompanies.

LICENSINGRELATIONSHIPSMEGA Brands also has licensing relationships with third party companies where it produces

productssuchasHALO®,Skylanders®,CallofDuty®,Assassin'sCreed®,PowerRangers®,Hello

Kitty®,SpongeBobSquarePants®andothers.MattelalsohaslicensingrelationshipswithDisney

and produces products such as Barbie andHotWheels. This acquisitionwill allowMattel to

expand its licensing and entertainment partners and compete betterwith Hasbrowhich has

focusedmoreheavilyonlicensingpartners.(MSNMoney,2014)

Due to theunfavorablegrowthconditions in the industry, LEGOmoved inanunprecedented

directionbyestablishingtheirownfranchisewiththecriticallyacclaimedLEGOmovie. Lego’s

move towards acquiring and licensing their own franchise while also capitalizing on other

franchise agreements is truly a new action in the industry. It is both a threat and an

opportunity that Mattel must capitalize on and owning MEGA Brands with experience in

licenseswhichholdtremendouspotential.(EBSCOHost)

MEGABRANDSTOLEVERAGEMATTELSCALEAnotheraspectof synergiesbetween the twocompanies is thesimilarityof theiroperations,

and theirability tosharedistributionnetworks. Integrationbetween the twocompanieswill

allowMEGABrandstodrasticallycapitalizeonMattel’ssize,growthandscale. (Collins,2014)

MEGA Brands would also be able to take advantage of significant growth outside of North

AmericaasMattelispresentin250markets.(EBSCOHost)Emergingmarketshaveproventobe

lucrative,hencebothMEGABrandsandMattelhaveaspirationstoexpandintoareassuchas

Brazil,China,RussiaandIndia.Thisisbecomingincreasinglyimportantasthetoymarketinthe

UnitedStatesbecomessaturatedandthepopulationcontinuestoage.ProductssuchasMEGA

Blokscouldalsostandtogainmarketsharebyco-brandingwithMattel inareasof theworld

where they are not positioned in themarketplace. This would allow them to capitalize on

Mattel’snamerecognition.(Horowitz,2014)



Inanefforttostreamlineoperations,thecompanywouldalsobeabletoutilizeandcross-brand

severaloftheirowninternalproductsallowingthemtomoreefficientlyandeffectivelymarket

their products across their entire geographical distribution area. Finally, the two companies

could see increase efficiencies in their purchasing capabilities and deliverymethods as their

productportfolioincreases.(MSNMoney,2014)

PRODUCTIONINNORTHAMERICAWith the risingcostsassociatedwithproduction inChina, the increasedpolitical instability in

other parts of the world, MEGA Brands returned much of their production back to North

America,more specifically,Montreal. That, coupledwith theever-increasingcostsofoil and

the rise in North American sentiment towards sustainability, it is no surprise thatmany toy

manufacturers that relyonmass-productionare starting to return to localproduction that is

increasingly competitive by means of government incentive and high-end technologies that

improvequality control. This is a tremendousopportunity forMattel to establish aworking

modelforreturningsomekeymanufacturingbacktoNorthAmerica,capitalizingonthelatest

technology available to MEGA Brands and perhaps gaining a strong advantage by applying

similarpatternstoencouragepartnershipswithlocalgovernments.

POTENTIALOBSTACLESTOTHEACQUISITION

Shareholders’Approval

ThetransactionannouncedonFebruary28thwasapprovedbytheBoardofDirectorsandithad

thesupportof shareholderswith39%ofMEGABrandsstock, including the foundersand the

firmFairfaxFinancialHoldingsLtd.(whichhadalsoinvestedinMEGABrands);however,certain

levelofdeal riskwas involvedasthearrangementresolutionneededtheapprovalofat least

two-thirds of the votes cast by shareholders and a simple majority of the votes cast by

shareholdersotherthanthefoundersMarcBertrandandVicBertrand(MarowitsR,2014).Of

theMEGABrandsshareholderswhovotedatthemeeting,99.96%wereinfavourofthedeal.



ProvincialGovernmentApprovalRequired

Additionaldealriskwasinvolvedinthetransactionasthefinalarrangementwasalsosubjectto

the approval of the Superior Court of Québec (Commercial Division) at a final hearing. The

agreementwouldonlybecompleted ifall regulatoryclosingconditionshadbeensatisfiedor

waivedbyTheCourt.

AlternativeBidders

An alternative bidder could also have been an obstacle to the closing of the arrangement

betweenMattel andMEGA Brands. Although there was never an official offer at the time,

Hasbro,hadshowninterest inMEGABrandsseveralyearsagowhentheCompanywasinthe

midstof a turmoil thatnearly sent it intobankruptcy. Theseproblems from theearly2000’s

occurredwhenMEGABrandswassuedbyLEGOforcopyrightinfringement,hadcripplingdebt

andneededtorecallanentirelineoftoysthathadchokinghazards.(EBSCOHost)Recognizing

thispotentialobstacle,MattelincorporatedadefensivemeasurethroughabreakfeeofUS$12

millionincasetheBoardofDirectorsofMEGABrandsterminatedtheagreementinfavorofan

unsolicitedsuperiorproposal.InthiswayMattelsoughttoincreasethecostoftheacquisition

forotherpotentialbidders(Mattel,2014).

VALUATIONThe comparable company analysis and the discounted cash flow method were used to

determineavaluationforMEGABrands.ThevaluationwasperformedasofDecember31,2013

since financial information regarding MEGA Brands and the comparable companies were

readilyavailableforthisdate.ThethreeavailablecomparablecompanieswereMattel,Hasbro,

and LeapFrog Enterprises. Although there was a considerable difference in market

capitalizationbetweenthecompanies,a lackofpublicly tradedcompanies in this sector (e.g.

LEGOandCrayola LLC)meantusing all threeof these companies.MEGABrandshadamuch

largermarket capitalization than LeapFrog although it was significantly smaller compared to

MattelandHasbro.Thecomparablecompanyanalysisprovidedawidepricepershare range

forMEGABrandsbetweenC$15.51andC$24.84withanaverageofC$20.07(Appendix6).



Thediscountedcashflow(DCF)methodprovidedapricepershareofC$16.36onastand-alone

basisforMEGABrands(Appendix7).Thecompanyhadalowcostofdebtaswellasalowcost

ofequity(ascalculatedusingtheCapitalAssetPricingModel),resultinginaweightedaverage

costofcapitalof5.44%(Appendix8).ConsumerGoods isadefensivesector,whichgenerally

carriesa lowerriskrelativetothemarketandthereforea lowbeta(0.701forMEGABrands).

Thecompany’s revenuegrowthwasassumedtobe10%peryear in2014basedannual sales

dataintheU.S.giventhatMEGABrandsisprimarilyinNorthAmerica.The10%wasanestimate

basedonthe2012and2013averagesalesgrowthintheBuildingsSetscategoryandtheArts&

CraftscategoryinwhichMEGABrandsoperates(TheNPDGroup,2014).Thegrowthratewas

assumedtodeclineby2%peryearoverthenextfiveresultinginaterminalgrowthrateof2%.

Costsasapercentofrevenuewerebasedonfiveyearhistoricalaverages.

Thesynergiesthatwouldbecreatedasaresultofthemergercanbebroadlycategorizedinto

increased revenue and lower costs. Synergies were calculated based on the following

assumptions(Appendix9):

• AccesstoMattel’sbroaderinternationalreach,itsdistributionnetworks,andadditional

licensingcouldincreaserevenueby2%peryearforthenext5years,whichwouldresult

inadditionalvalueofUS$59.3MM.

• MEGABrands could leverage themarketingeffortsofMattel resulting in reductionof

marketing costs of 1% per year for the next 5 years. This will create US$21.9MM in

savings.

• AccesstoMattel’snetworkscouldalso lowerdistributionandadministrativeexpenses

by1%peryearforthenext5years.Giventhatthesecostsaccountedforroughly23%of

revenues,thesavingsgeneratedbythisissignificantatUS$112.5MM.

Thetotalvalueofsynergiesinadditiontothecompany’sexistingvaluewillresultinavalueper

share of C$23.73,which indicates thatMattel could potentially realize approximately 34% in

additionalvaluefromthismergerusingtheestimatesmentionedabove.



Bloomberg’s analyst estimates asof February27, 2014,onedayprior to theannouncement,

showed five estimates ranging from C$14 to C$19 with an average of C$16.80 (Bloomberg

FinanceL.P.,2014).Theannouncementofthedealwaswelcomebyanalystswhoagreedthat

theacquisitionwashelpfulandwouldcreateinternationalexpansionopportunities,attractive

licensing opportunities, and cost savings (Johnson, 2014) (Linsdell, 2014). Based on the

valuation analysis and considering the potential synergies that can be created, the premium

paidbyMattelatC$17.75pershareisjustified.

Mattel has a strong balance sheet with a cash balance of US$1.039 billion, which is well in

excessoftheMEGABrandsacquisitionprice.AnallcashdealissupportedbyMattel’scurrent

position.Althoughthecompany’sdebttoequityratioisat0.98,itscostofdebtislowgivenits

BBB+ credit rating. The yield on a 7 year bond for example, was around 3.5% (Bloomberg

Finance L.P., 2014). While the use of cash has its risks, it also has the benefit of avoiding

shareholderdilutionandavoidingfuturedividendpayments.

One issue specific to the valuation of MEGA Brands is the company’s revenue growth. The

company’sgrowthdoesnotshowacleartrendthusitisdifficulttopredict.Theindustrygrowth

rate isusedasaproxy tohelpalleviate this issue.Next,MEGABrands isamid-capcompany

while the comparable companies available were small caps and large caps. There was a

noticeabledifference intheratiosofsmallcapsand largecaps,however,bothwere included

given that the size ofMEGABrandswas in between the two. Also, the company’s reporting

currency istheUSdollar.Thus,theexchangerateneedstobetakenintoconsiderationwhen

determiningavaluationforMEGABrands.Theexchangerateusedwastheapproximate5year

annualaverageCADUSDrateof$0.967(OANDACorporation,2014).Theexchangerateplaysa

keyroleindeterminingthecompany’svalue.

SHAREPRICEThesharepriceofMattelandMEGABrandswereexaminedfromJanuary2012untilJune30,

2014(Appendix10).Mattel’ssharepricetrendedhigherin2012andearly2013butstagnated

inthelatterpartof2013.MEGABrandstrendedlower inthefirstthreequartersof2012but



increased significantly over the next year until October 2013when it reportedweaker third

quarter2013earningscausingthesharepricetodecrease.

Inthefirstquarterof2014,Mattelreportedlowerthanexpectedearningsonweakerholiday

demand and its share rating was lowered by various analysts causing the share price to

decreaseby21%untilthedaypriortotheacquisitionannouncement.ThesharepriceofMEGA

Brandsfollowedsuitepossiblyontheexpectationthatittoowouldmissitsearningsestimates.

MEGABrands’ share price decreasedby 14% since the start of 2014 to settle at C$13.07on

February 27, 2014, one day prior to the acquisition announcement. On the day of the

announcement,thesharepriceofMEGABrandsincreasedby36%tocloseatC$17.72,avalue

justbelowtheofferpriceofC$17.75.Mattel’ssharepriceincreasedslightlyby0.4%tocloseat

US$36.94.

From the acquisition announcement date until June 30, 2014, the share price ofMattel has

increasedby6%,whichisexactlyinlinewiththemovementoftheS&P500index.Itisevident

thatMattel’ssharepricehasstabilizedsincetheannouncement,whichisapositivesignforthe

company.Giventhematurenatureoftheindustryandlowbetaforthestock,amovementin

linewiththemarketfurtherreinforcesthepositivenatureoftheacquisitionalthoughalonger

timehorizonwillneedtobeexaminedforthedefinitiveimpactofthisacquisition.

CRITICALMILESTONES

Shareholdervote-March18,2014

Themergerneededtoobtain2/3ofvotescastbyshareholderspresentorbyproxy,andsimple

majorityof votes inpersonorbyproxyof all those that arenot InterestedHolders. (Planof

Arrangement,2014)

December2014

The true value of the acquisition will come to light as themerged entity comes out of the

holiday season asMattel suffered a 10% decline in North American sales last year. (Ziobro,

2014)



2015FiscalYearEnd

Mattel’s earnings will take a hit in 2014 due to the acquisition, but it is expected that the

companywillobtain futureprofits starting in2015. (Ziobro,2014) Futurepress releasesand

fiscal year-ends should be monitored in order to gauge what effect the MEGA Brands

acquisitionhadonMattel’sbottomline.

RISKSANDROCKYPLACES

INTEGRATIONAPTITUDEThemostapparentrisktothisacquisition’ssuccess isMattel’s lackofcapability inbusinesses

integration. In previous cases, there seemed to limited information sharing and synergy

capture between businesses. Mattel does not traditionallymeddlewith the companies that

theyacquire.(EBSCOHost)Thisisariskforthecompany,asitwillnottakebestpracticesand

apply them to theotherbusinessesandbrands thatare in theirportfolio inorder to remain

competitive. Asoutlinedabove, the companyhas thepotential to gain frommanydifferent

typesofsynergiesandtheappropriatelevelsofinvestmentmustbemade.

INDUSTRYCONSOLIDATIONAs mentioned earlier, the risks exposed by this transaction include the possibility of even

further problems in the competitive environment. Industry professionals argue that Hasbro

andseveralotherlargeplayerswouldbelookingtomakedefensivemeasuresthatmay,inthe

long-termhampergrowthintheindustry.

SUSTAINABILITYINTOYMANUFACTURINGFurther to this, sustainability isbecomingan increasingconcern for the industryparticipants.

NotonlyisthecompanyproductionheavilyfocusedinAsia,thematerialsusedtoconstructthe

toys (for the most part) is made of plastic polymers and other materials that are not

environmentallyfriendly.AtthistimeLEGOislookingtomakechangestotheircurrentplastic

compositions.(CanadianPlasticsJournal,2014)Addtothistheshippingassociatedwithgetting

theseproductsintoNorthAmericanConsumers’hands,anditisarecipeforanon-sustainable

business–somethingconsumersarebecomingmorecognizantof.Ashiftinconsumerdemand



hastremendousconsequences.WiththemovetopurchaseMEGABrands,Mattelhasshielded

itselfagainstthisriskandgetsahead-startwithdirectmanufacturinginNorthAmerica.

INTEGRATIONISSUES

GovernmentSponsorship

MEGABrands has focusedonbringing constructionback to Canada as it investedmillions in

buildingcapacitywithinMontreal. Thismaypresentpotential issuesasthecompaniesmerge

operations. The company is heavily invested in state-of-the-art equipment that allows it to

competewithfactoriesinChinabyimprovingefficiencies.(EBSCOHost)MEGABrandshasbeen

tremendouslyefficientinobtaininggovernmentsupportinQuebec.Thisacquisitionmayimpact

theamountoffundingthecompanyreceives.

CulturalIntegration

Brothers Marc and Vic Bertrand will stay on for one year to ensure a smooth transition.

(Ziobro,2014)Havingowners/founderson-boardforsuchanextendedperiodoftimemayalso

impacttheorganizationandhoweffectivelythetwocompanyculturescometogether.MEGA

Brands was a company that was on the verge of extinction as recently as 2002. It can be

reasonably assumed that the two corporate cultures are very different and that Mattel’s

approach of keeping the businesses separate may be appropriate. If the entities are kept

separate, there may be limited information sharing and no manufacturing/shipping

optimizations,whichmay affect long-termprofitability forMattel. The two companiesmust

cometogethertoimprovetheirexistingindividualpositionsespeciallyiftheyaretojustifythe

premiumthatMattelpaid.



APPENDICES

APPENDIX1:PORTER’SVALUECHAIN

Figure1ValueChain

PRIMARYACTIVITIES

InboundLogistics

• SKUefficienciesminimizelogisticscosts

• Mattelownsandoperates13DistributionCentres,Manufacturing&ToolingPlants

• Mattel concentrates its efforts on the selectionofwell-qualified licensees and setting

clearexpectationsinthecontractprocessinordertoinfluencebothproductqualityand

workingconditions.

Operations

• Mattel’s Global Manufacturing Principles (GMP) sets the production standards for

Mattelownedfactoriesandthosethatproduceproductsforthem

• Approximately half of Mattel's products are manufactured in one of nine owned

factories:fourinChina,twoinMexicoandoneeachinMalaysia,IndonesiaandThailand



• The other 50% of their products are produced by vendors predominantly located in

Southern China; their vendor manufacturing base is composed of approximately 40

majorvendorsand30 specialtyvendors thatarecalledupon for specificprocessesor

technologiesneededtoproducesmall-volume,non-coreproducts

• Mattel reversed its earlier strategy of outsourcing to factories in Asia by owning and

operatingsomeplantsinAsiaforproducingitsmostpopularproductsinordertobetter

controlproductqualityandsafety

• Matteloperatesmoreaccreditedtestinglabsthananyothertoymakerintheworld

OutboundLogistics

• Thecompanyhasitspresencein40countriesandterritoriesaroundtheworld

• Mattelemployspackagingoptimizationtominimizetransportcosts

MarketingandSales

• Strongbrandportfolio;2013growthledbycorebrands.Barbieistheworld’sNo.1doll

property

• Mattel’sproductaresoldin150countriesbyretailers,aswellasdirectlytoconsumers

Service

• In2011,80%ofMattel’scontactswereweb-based,up10%from2009,andattributedin

parttoimprovementstoMattel’sconsumerwebsites

• Mattelisimprovingitsabilitytolistenandengagewithconsumersthroughsocialmedia

• Mattelreceivescloseto1,000responsesperweekfromcustomerswhotaketheiremail

survey. They constantly seek feedback from our consumers about the quality of the

serviceMattelprovidesandhavemadechangesbasedontheirresponses.

SUPPORTACTIVITIES

FirmInfrastructure

• MattelhasorganizeditsbusinessstructureintotheGlobalBrandsTeam,NorthAmerica

Divisionmodel,andAmericanGirl

• Mattel integrates quality, Global Manufacturing Principles (GMP) and sustainability

performanceconsiderationsintobusinessprocessessuchasnewprojectlaunches



TechnologyDevelopment

• Expandeddigitalcapabilitiestohelpbrandsengagewithcustomers

• Historically, consumer inquiries were handled primarily by telephone, butMattel has

expandedtheirservicessince2009toincludeemail,livechatandsocialmedia

Procurement

• Mattel has numerous suppliers for its raw materials. Materials are evaluated

consideringsafety,quality,durabilityandcompliancewithregulationsworldwide

• In2011,Matteladoptedprinciples toguide thecompany’sprocurementofpaperand

woodfiberusedinpackagingandproducts

• ThecompanyhasinplaceaglobalinitiativecalledTheGlobalCostLeadershipprogram

whichincludesprocurementinitiativesdesignedtofullyleverageMattel’sglobalscalein

areassuchascreativeagencypartnerships,legalservicesanddistribution.



APPENDIX2:SWOTSTRATEGIESMATTEL

Strengths•Strongprofitability•Highbrandawareness•Known-brands:Barbie,HotWheels,FischerPrice

•LicencescontentfromDisney•Globalmanufacturingandsourcing

Weaknesses•HeavyreliancesfromlicensingcontentfromDisney•Walmart,TargetandToys"R"Usaccountfor71%ofsalesintheU.S

•Relianceonmovieperformances. Ifamovieisnotsuccessful->lowsalesoftoys

•Lackofpresentintheonlineordigitalentertainmentbusiness

•Productsaretargetedataspecificagerange(under10yearolds)

Opportunities•LicenseMattelproductsouttothirdpartiesforentryintootherverticalmarkets

•DevelopMattel-owned lifestylebrand(i.eBarbieyogamats)

•AcquireacompanyinthesameindustryandexpandMattelportfolio

Threats•Electronicgamesmoreattractivetoyoungeraudiencesthantraditionaltoys

•Recalloftoysin2007negativelystillaffectsMattel'sbrandwithconsumersandlicensees

•Foreignexchangefluctuationrisk•Politicalunrest,labourstrike



APPENDIX3:SWOTSTRATEGIESMEGABRANDS

Strengths•Profitabilityandfinancialperformance•Strongbrandawareness•Known-brands:MEGABLOKS,MEGAPUZZLES,ROSEART

•Strongrelationshipswithcompaniestosecureaccesstoproductseriesandliscencingpacts(Nickelodeon,Disney)

•Globalmanufacturingandsourcing

Weaknesses•Lossesduetoproductrecalls(Magnetix)•Volatileperformance•Mostlyconcentrated inCanadaandNorthAmerica.

•Lowmarketshareininternationalmarkets•CompanyhasfacedlawsuitsfromplayerssuchasLEGOinthepast.

Opportunities•Movement fromphysicaltoystovirtualtoys•Innovativeandefficientdesignprocesseswouldallowcompaniestocapitalizeonchangingconsumerpreferences

•Rightstomanufactureandsellbrandtitlesbeyondthechildren'scoremarket

•Internationaloperationsallowforfurtherglobalexpansion

Threats•Strongcompetitionwithdominancebylargeplayers

•Strictrulesandregulations•Retailershavesignificantinfluenceintermsofdeliverytimesandshelfspace

•Industryisseasonalandalsodependent oneconomicactivity

•Stagnantindustrygrowth•Industryparticipantsheavilyreliantonexportactivity.

•Globaloperationscreatesadditionalrisksduetocurrencyfluctuations,politicalunrest,labourdisputes

•Knockoffbrandsandcounterfeitgoodscanreduceprofitability



APPENDIX4:FIVEFORCESANALYSIS

BARGAININGPOWEROFSUPPLIERS(MEDIUM)

Industry

§ Mattel’srawmaterialsconsistofplastic,resins,metals,alloysandfabric.(Hoover'sOnline)

Ingeneral,duetoitsstrongglobalbrandpresencethebiggesttoymanufacturerssuchas

Mattel,HasbroandLegohaveahugebargainingpowerovertheirsuppliers

§ Most toy companies have their ownmanufacturing facilitieswhere labour is outsourced

fromlowcostlabourcountriessuchasChina

§ Toycompaniesestablishlicensingrelationshipswithmediacompaniesthatallowthemto

produce toys for their brands. Given that licensing creates a significant share of their

revenue,licensorshaveastrongpoweroveritssuppliersassuppliersoflicensingrightsfor

theirvaluablebrands.

Mattel’sPosition

§ ThereexistsarealthreatofshortagesininputssuchasthatexperiencedbyMattelinthe

past(Mattel,Inc.,2013)Further,Hasbrohascitedongoingrisksintheirannualreportdue

tothevolatilityinpricesofrawmaterialsreinforcingtheriskmanufacturersinthisindustry

facedwithfluctuatingrawmaterialandcomponentprices.

§ MattelownsfacilitiesformanufacturinginAsia-PacificandMexicowherebothwagesand

productioncostsarelow.(Hoover'sOnline)

ExistingRivalry

(MEDIUM)

ThreatofSubstitutes(MEDIUM->Growing)

BargainingPowerofCustomers(MEDIUM)

BargainingPowerofSuppliers(MEDIUM)

ThreatofEntry(LOW)



§ Mattel’s largest licensingrelationship iswithDisney.Thelion’sshareof$262MillionUSD

that Mattel spent in 2011 on license acquisitions is attributed to Disney. (Euromonitor

International,2013)WhileMattel’sstatusasthelargesttraditionaltoymanufacturerinthe

worldprovidesthemwithagoodbargainingpositionagainstDisney,thisdependenceisa

risk forMattel as any future difficulties in renewing such license could have a material

effectonMattel’srevenues.(EuromonitorInternational,2013)

§ Significant increases inthepriceofcommodities,transportation,or labor, ifnotoffsetby

declines in other input costs, or a reduction of costs of the delivery of raw materials,

componentsandfinishedproductsfromMattel’svendorscouldnegativelyimpactMattel’s

financialresults.(Mattel,Inc.,2013)

§ Any material failure, inadequacy, or interruption resulting from third party vendors or

outsourcings couldharmMattel’s ability toeffectivelyoperate itsbusiness. (Mattel, Inc.,

2013)

§ WhilepriceshaveincreasedforrawmaterialsandlabourinAsia intheperiodpost2009,

Mattelhascounteredsuccessfullybyraisingtheirownpricesandimprovinggrossmarginin

the process. (Townsend, 2012) This indicates thatwhile there is the risk of volatility of

inputs with regards to cost, price elasticity of demand is relatively low for Mattel’s

consumers.

BARGAININGPOWEROFCUSTOMERS(MEDIUM)

Industry

Customersarecomprisedof:

o Traditionallarge,mediumandsmallretailers-Walmart,Target,Toys-r-us,etc.

o Onlineretailers-Amazon

o Individualcustomers

§ Individually, consumers have low power relative to the manufacturers in the industry

howeverinaggregate,economicfactors,trends,demographicscanhaveastrongeffecton

theindustryandthusdriveuptheirbargainingpower.

o Global child population had been declining due to falling family sizes however this is

expected to be a short-lived phenomenon as developing countries populations grow.



(EuromonitorInternational,2011)Thisaspectofdemographicsisextremelyimportant

for Toymanufacturers given that “growth in the population of children aged 12 and

youngerdrivesdemandsfortoys.”(Hoover'sOnline)

§ Consumer spendingpower largely influences industry’s revenuesand thusprofits. In this

respect,thegeneralstateoftheeconomy,availabledisposableincomeandunemployment

areallleadingindicatorsofwhatdirectiontheindustrywillhead.(IBISWorld,2013)

§ Industry is highly seasonalwith the peak occurring during the traditional holiday season

(leadingtowardstheendofthefourthquarter).Thishasanaggregatingeffectwithregards

toconsumersinfluencingtoymanufacturer’sschedules,particularlyaroundproductionand

productreleases.

§ ThelargerretailerssuchasWalmarthavebeendevelopingtheirownprivate-labeltoysthat

would take shelf space away from branded traditional toys aswell as compete directly.

(Mattel,Inc.,2013)

Mattel’sPosition

§ ThereisarelativelylowpriceelasticityofdemandwithrespecttocustomersofMattel

§ Mattelhasdemonstratedtheyaretoacertainextent,apricesetterinthisindustry.

§ The threat of Mattel’s major retailer customers such as Walmart developing their own

competitiveprivate-labeltoysthatwouldcompetewithMattel’sofferingshasbeencited

asariskbyMattelthemselvesintheirannualreport.(Mattel,Inc.,2013)

§ Mattelenjoyshighconsumerloyaltythroughtheirstrongbrandequitypositionthatwould

servetomitigatethisthreattoacertainlevel.

§ Mattel’sbusinessishighlyseasonalanditsoperatingresultsdepend,inlargepart,onsales

duringtherelativelybrieftraditionalholidayseason.(Mattel,Inc.,2013)

THREATOFNEWENTRANTS(LOW)

Industry

§ GlobalmanufacturerssuchasMattelandHasbrohaveeconomiesofscaleandeconomies

ofscope.

§ Long-term licensing agreements for most lucrative film, sporting properties in place

present barriers given that licensed toys account for a large percentage of the toy



industry’srevenues.“IntheUS,forinstance,licensedtoysaccountedfor26%oftraditional

toysandgamesalesin2011.”(EuromonitorInternational,2013)

§ Capitalizationcostsarehighforcompetitorslookingtocompeteglobally.

§ Establishingrelationshipswithtoyretailersandglobaldistributors.

o Globaldistributionnetworks

o Relationshipswithtoyretailersandshelfspace.

§ Barriers to entry for substitute industries are relatively low (Mobile device software,

gamingcontent,etc.)

Mattel’sPosition

§ Significant changes in currency exchange rates or the ability to transfer capital across

borders could have a significant adverse effect on Mattel’s business and results of

operations.(Mattel,Inc.,2013)

o Matteloperates facilitiesandsellsproducts innumerouscountriesoutside theUnited

States. During 2012, Mattel’s net sales to international customers comprised 46% of

Mattel’s total consolidated net sales.Management expects that sales to international

customerswillcontinuetoaccountforasignificantportionofMattel’ssales.

THREATOFSUBSTITUTES(MEDIUM->GROWING)

Industry

ExamplesofSubstitutes:

§ AppleiPad,AndroidTablets,mobilesmartphones

§ PCs,Laptopswitheducationalortargetedcontent/softwareforchildren

§ Videogameconsolesandhandheldgamingdevices

§ The threat of substitutes is growing thereby will have an impact on the traditional toy

industry’sprofitsinthelongerterm.

o Qualityofsubstitutesisincreasingasplatformsmature,developersbecomemoreadept

at leveraging the capabilitiesof suchplatforms indevelopinghigherquality andmore

compellingcontent.Devicetechnologyisimprovingatarapidpaceenablingnewforms

ofinteractivityandenhancedcontent.



o Relatively low switching costs involving primarily the base platform or device and

incrementalcostsforcontentforthoseplatforms.Onceaconsumerhasbought intoa

deviceplatform,therearepotentiallypowerfulnetworkeffectsthattiethatconsumer

into the platform (such as with gaming consoles, a mobile device platform such as

AndroidoriOS,etc.)

Mattel’sPosition

§ Mattel’sbusinessishighlyseasonalanditsoperatingresultsdepend,inlargepart,onsales

duringtherelativelybrieftraditionalholidayseason.

§ Inaccuratelyanticipatingchangesandtrendsinpopularculture,mediaandmovies,fashion,

ortechnologycannegativelyaffectMattel’ssales.(Mattel,Inc.,2013)

§ Due toahighpercentageofMattel-brandedproducts coming from licenseswithDisney,

otherthird-parties,threatofentryofnewplayersposesasignificantrisktoMattel losing

theselicensingagreements.(Mattel,Inc.,2013)

§ Franchises and licensed product lines of the major manufacturers such as Mattel and

Hasbro serve as strong counters to substitute threats as no direct substitutes (although

theycanbecomplements)cancompetedirectlyforsuchproductsthatareindemandby

consumers.

§ Theproductionandsaleofprivate-labeltoysbyMattel’sretailcustomerssuchasWalmart

andToys-R-USmay result in lowerpurchasesofMattel-brandedproductsby those retail

customers.(Mattel,Inc.,2013)

o In recent years, consumer goods companies, including those in the toy business,

generallyhaveexperiencedthephenomenonofretailcustomersdevelopingtheirown

private-label products that directly compete with the products of traditional

manufacturers. Some retail chains that are customersofMattel sell private-label toys

designed,manufactured and branded by the retailers themselves. These toysmay be

sold at prices lower than comparable toys sold by Mattel and may result in lower

purchasesofMattel-brandedproductsby these retailers. In somecases, retailerswho

sell these private-label toys are larger thanMattel and may have substantially more

resourcesthanMattel.



EXISTINGCOMPETITIVERIVALRY(MEDIUM)

Industry

Majorplayers:

o MattelandHasbroarethelargestfirmsintheglobaltoymanufacturingindustry.

o Lego(privatelyheld,limitedfinancialinformation)

§ Bysomereports,Legohasrecentlybecomethenumbertwomanufacturerbasedon

2012revenues.(Gottlieb,2013)

o NamcoBandai,TomyCo

o Collectivelyaccountfor>85%ofrevenuesintheindustry

§ Theindustryishighlycompetitivewherefirmsjostleforsecuringlicensestoproducetoys

formajorfilm,television,comicandothermarketablefranchises.

§ Firmsarealsounderpressuretodevelopnew in-housefranchises inadditiontosecuring

long-termlicenseagreements.

§ Thethreelargestfirms,Mattel,HasbroandLegoareessentiallyanoligopolywithenough

powerandbrandrecognitiontokeeppriceshighenoughtogenerateattractivemargins.

Mattel’sPosition

§ Mattelaccountsfor~30%ofrevenues,thelargestsingleplayer

o EstablishedeconomiesofscalewithownershipoffactoriesinChinaandMexico.

§ Mattel’slargestbrandsarewell-knownglobally:

o Barbie, HotWheels, Disney-licensed brands, including Toy Story, Cars, Fisher-Price to

targetyoungchildren

§ Highlevelsofcompetitionmakeitdifficulttoachieve,maintain,orbuilduponthesuccess

ofMattel’sbrands,products,andproductlines.(Mattel,Inc.,2013)

o “Mattel faces competitors who are also constantly monitoring and attempting to

anticipate consumer tastes, seeking ideas which will appeal to consumers and

introducingnewproductsthatcompetewithMattel’sproducts.Inaddition,competition

foraccesstoentertainmentpropertiescouldlessenMattel’sabilitytosecure,maintain,

andrenewpopularlicensestoentertainmentproductsdevelopedbyotherpartiesand



licensed to Mattel or require Mattel to pay licensors higher royalties and higher

minimumguaranteedpaymentsinordertoobtainorretaintheselicenses.

§ In2012,Mattel’sthreelargestcustomers,Walmart,Toys“R”Us,andTarget,accountedfor

approximately37%ofnetsales,anditstenlargestcustomers,intheaggregate,accounted

forapproximately47%ofnetsales.(Mattel,Inc.,2013)

o Liquidity problems or bankruptcy of Mattel’s key customers could have a significant

adverseeffectonMattel’sbusiness,financialconditionandresultsofoperations.

• Mattel’sability tomeetcustomerdemanddepends, inpart,on itsability toobtaintimely

andadequatedeliveryofmaterials,partsandcomponents from its suppliersand internal

manufacturingcapacity.

§ 85%ofindustryrevenuesattributedtofivefirms.

o Oligopolystructure-higherindustryprofitabilityamongstlargerfirms.

§ Industrystructurechangingduetoprimarilytohighthreatfromsubstitutes

o Lowerprofitability in the longer term implies the industrymaydeclineover the long-

term.

§ Even though there is strong revenue growth opportunities in emerging markets,

thesehavelowerprofitabilityduetothelowerpricepointsexpectedinsuchmarkets.

Firmsintheindustrywillneedstrategiesthatwillpositionthemaccordingly,inordertoprotect

againstthisgrowingthreat.



APPENDIX5:PESTLEANALYSISOFTHETOYINDUSTRYEconomic • Emerging markets economic development and the emergent middle class

coulddriveindustrygrowthinthenextfewyears:EasternEuropeandLatinAmerica were the fastest growing regions globally in traditional toys andgames in 2011, both recording a double-digit value growth. Asia Pacific isexpectedtobecomethebiggest traditional toymarketover thenextyears(Euromonitor,2013)

• TheConstructioncategoryoutperformedoveralltraditionaltoysandgamesbya largemargingloballywithandannual growth rateof15% in2012upfrom14%theyearbefore.Allmarketssawanincreaseinsales,attributabletoLEGOwhohasadominantpositioninthiscategory,accountingformorethan62%ofglobalvaluesalesin2012(Euromonitor,2013)

• EventhoughChinacontinues tobe themost importantsourceof toys, thecountry is losing the competitive advantage as operating conditions forfactoriesremainchallenging,withquadruplingblue-collarwages,ashrinkinglabormarket,andrisingrawmaterialcosts.Thistrendmayforcetoysmakersto look for different sourcing alternatives over the next few years (ToyIndustryAssociation,2013)

Socio/Cultural • Whileelectronictoyscontinuetogrowth inpopularity,theamountoftimechildrenspendplayingonthesedeviceshasbecomeaprimaryconcern forparents around theworld. In addition, parentswith less recreational timeincreasingly prefer toys that their children can safely play by themselves.(IBIS World, 2013). As a result, Construction toys have become popularamong parents seeking to limit the amount of time their children spendusing iPads and other electronics with screens. Parents are increasinglylooking for products that can stimulate a child’s imagination and creativity(Euromonitor,2013)

• Children's television viewing habits and the popularity of forthcomingchildren'sfilmswillcontinuetostronglyinfluencechildren´spreferencesandtherefore industrydynamics.Viewershipofglobal televisionchannels, suchas Nickelodeon and Cartoon Network, is spreading in emerging markets,supporting the brands tied up with children's programmes. (Euromonitor,2011)

• Age Compression Phenomenon: Increasing children´s preferences forsmartphonesandvideogamesafter theageof10 can threaten traditionaltoysmakers thatmay find itdifficult toretain thisaudience. (Euromonitor,2011)

• Socializing andwanting to interactwith others is a dominant factor in thewayolderkids(>10)areplaying.Thistrendisanopportunityfortoymakersto retain the tween/teen market through new product developmentinvolvingsocializingelements.(ToyFairTimes,2013)

• Fathersaredoingmoreofthefamilyshoppingasthenumberoftwo-income



householdsandthoseinwhichthewomanworksandthemanstaysathomecontinues to grow (In the U.S. one-fifth of fathers with preschool-agechildrenandworkingwives said theywere theprimary caretaker in2010).Thistrendisexpectedtodrivesalesincategorieslikeconstructiontoysthatappealmoretodads.(Clifford,2012)

Technology

Trends

• NewinexpensivetechnologiesandemergingtablettoysandgamesonAppleandAndroiddevicescontinuetobereleased,andtheirofferingsarevaried.It is expected that these technologies will continue to cut into traditionaltoys sales.NPD’s list of the top toys of 2012 shows that Leap Enterprises’children’s tabletsareamong fourof theyear’s10biggest sellers, includingpositions1,2and4(Goldberg,2013).AccordingtoIBISWorldelectronictoyswill make up the largest product segment for toy, game and dollmanufacturers, accounting for an estimated 32.9% of industry revenue in2013.(IBISWorld,2013)

• Increasingpenetrationofelectronics, incorporationofdigitalelements intotraditional toys (i.e. plush toys) and growing demand for intelligent andinteractive toys isexpectedto increaseover thenext fewyears.This trendcanpushnon-toyscompanies(likeMicrosoftandIntel)toaddtheirofferingstothemarket.(Reportlinker,2013)

• Toys and Games Cross-overs: Emerging trends towards cross-industrycollaboration between traditional toys, video games and electronics areexpected to increase. Hasbro and LEGO havemoved from traditional toysand games into video games via collaborations with Electronic Arts andTraveller'sTales,respectively.(Euromonitor,2011)

Legal • Import Regulations: taking into consideration that approximately threequartersoftheworld´stoysaremadeinChina,anyimportrestrictionsfromChina on the grounds of toy quality or safety may negatively impactexpansionplans inemergingmarketsof toyscompanies thatproducetheirproductsinthiscountry.(Euromonitor,2011)

• LicensesRisk:Thereisatrendtowardsglobalisationoflicences;forinstance,the top10 licensors in2011are set toaccount for80%of licensed toys inWestern Europe. This trend is increasing licensors’ power, giving them theability to dominate licensing agreement conditions. In addition, somepowerfullicensors(i.e.WaltDisney)aremovingintooperatingitsownstoresputtingtoymakersatriskoflosingkeylicenses.(Euromonitor,2011)

• Increased product safety regulations are expected to emerge as aconsequenceofthehighlevelofoutsourcingandoffshoring(relocationofacompany’sbusinessprocessfromonecountrytoanother).Thistrendcouldput increasedpressureon toysmanufacturersas regulationsdifferenough



to result in complex and costly compliance and testing to better controlqualityandsafetystandards(IBISWorld,2013)

Environmental • Environmentally friendly andhazard-free features are expected tobecomesomeofthemainsellingpointsoftraditionaltoysandgamesoverthenextyears.Asaconsequence,green,eco-friendlytoysareincreasinglyemerging.For example, at the New York Toy Fair in 2013 and in South America´sbiggest toys event, environmentally friendly dolls as well as gamespromoting green practices like recycling were strongly promoted.(Fontenelle,2013)

• Demandsforgreaterenvironmentalsustainabilityofproductsareincreasing,notonlyfromlegislatorsandNGOs,butalsofromretailers.Increasinggreeninitiatives like the “ Extended Producer Responsibility in the U.S.(requirements formanufacturers of specified consumer products to eitheraccept back products at the end of their useful life or to subscribe to acollectivearrangementtodoso)continuetoemergearoundtheworld.(ToyIndustryAssociation,Inc.,2012)



APPENDIX6:COMPARABLECOMPANYANALYSIS

*ComparableratioswereobtainedfromBloombergwhiletheMEGABrandscompanyspecific informationwasobtainedfromthecompany’s2013AnnualReport.The comparable company analysis provided a wide range of prices for MEGA Brands between US$15.00 andUS$24.02withanaverageofUS$19.41.ThistranslatestoaCanadiandollarequivalentrangeofC$15.51to$24.84withanaverageofC$20.07.

Company EV/EBITDA Market Cap / Earnings Market Cap / Book value Market Cap to SalesMattell 12.25 19.33 4.96 2.10 Hasbro 12.17 22.40 4.24 1.75 Leap Frog 6.88 6.67 1.29 0.99 Average 10.43 16.13 3.50 1.61

*Jakks Pacific was considered as a comparable, however, the company has negative earnings and is significantly smaller than Mega Brandsand therefore excluded. Leap Frog was still included although it is a small cap compared to the other competitors. This is because MegaBrands is a mid cap while Mattell and Hasbro are considered large caps. Many toy companies such as LEGO and Crayola are private thus noinformation is available.

MEGA Brands Adjusted EBITDA 47.00$ EV/EBITDA Average 10.43 TotalEnterpriseValue 490.37$(-)FairValueofDebt 64.19$(-)MinorityInterest -$(+)Cash&CashEquivalents 16.42$EstimatedMarketCap 442.60$SharesOutstanding 27,186,768 PriceperShare 16.28$ DilutedEarningsperShare 0.93$ AverageMarketCaptoEarnings 16.13 PriceperShare 15.00$ BookValue 173,611,000$ BookValueperShare 6.39$ AverageMarketCaptoBookValue 3.50 PriceperShare 22.33$

Sales 404.74$ SalesperShare 14.89$ AverageMarketCaptoSales 1.61 PriceperShare 24.02$



APPENDIX7:DISCOUNTEDCASHFLOWMETHOD

ThepricepersharebasedonthediscountedcashflowmethodisUS$15.82orC$16.36

Assumptions:• Interestexpensewasassumedtobeconstantbasedoncurrentratesandcurrentdebtoutstanding.Thus,the

companyisexpectedtotakeondebtasdebtisretiredatcurrentrates.• Taxesarebasedonthecompany’scurrenttaxrate.NoTaxrecoveryisassumed.• DepreciationandCapitalExpenditureswerebasedon3yearaveragessincethesevalueswereveryconsistent.• Giventheswingsinnetworkingcapitalchanges,thisvaluewasassumedtobezero.• Costsasa%ofrevenuewerebasedon5yearaverages.• Revenuegrowthrateof10%isassumed,whichwilldecline2%peryeartoreachaterminalgrowthrateof2%.• OncethevalueisdeterminedinUS$,itisconvertedtoC$usinga5yearaverageexchangerateof0.967CADUSD.

MegaBrands($MM) 31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018

NetSales 338.90$ 368.00$ 376.80$ 420.27$ 404.74$ 445.21$ 480.83$ 509.68$ 530.07$ 540.67$CostofSales 219.10 222.70 235.60 262.45 255.70 278.99 301.31 319.38 332.16 338.80GrossProfit 119.80$ 145.30$ 141.20$ 157.82$ 149.04$ 166.23$ 179.52$ 190.29$ 197.91$ 201.86$

Marketing&Advertising 14.20 19.40 17.00 16.94 18.23 20.04 21.64 22.94 23.86 24.34Research&Development 11.40 12.30 14.50 16.22 15.39 16.22 17.52 18.57 19.31 19.70Selling,Distribution,&Admin.Expense 88.00 95.40 82.50 87.83 84.06 102.80 111.03 117.69 122.39 124.84Other 55.80- 0.30 2.40 0.96 1.46- - - - - -OperatingIncome 62.00$ 17.90$ 24.80$ 35.88$ 32.82$ 27.16$ 29.34$ 31.10$ 32.34$ 32.99$

InterestExpense 43.90 25.80 18.70 17.65 10.77 5.02 5.02 5.02 5.02 5.02OtherExpense(Income) 7.70 144.30- 3.00 - 2.87 - - - - -IncomeBeforeTaxes 10.40$ 136.40$ 3.10$ 18.23$ 19.18$ 22.15$ 24.32$ 26.08$ 27.32$ 27.97$

IncomeTaxExpense(Recovery) 0.30- 5.50 5.20- 1.64 1.59- 5.92 6.50 6.97 7.31 7.48NetIncome 10.70$ 130.90$ 8.30$ 16.59$ 20.77$ 16.22$ 17.82$ 19.11$ 20.02$ 20.49$

Depreciation 17.61 11.41 13.50 12.90 13.81 13.40 13.40 13.40 13.40 13.40ChangesinWorkingCapital 0.73- 14.70 24.01 14.41- 7.71 - - - - -CapitalExpenditures 7.10 9.98 23.25 19.23 20.23 20.90 20.90 20.90 20.90 20.90

OperatingIncome 62.00 17.90 24.80 35.88 32.82 27.16 29.34 31.10 32.34 32.99(-)Taxes 0.30 5.50- 5.20 1.64- 1.59 5.92- 6.50- 6.97- 7.31- 7.48-(+)Depreciation 17.61 11.41 13.50 12.90 13.81 13.40 13.40 13.40 13.40 13.40(-)IncreaseinWorkingCapital 0.73 14.70- 24.01- 14.41 7.71- - - - - -(-)CapitalExpenditures 7.10- 9.98- 23.25- 19.23- 20.23- 20.90- 20.90- 20.90- 20.90- 20.90-FreeCashFlow 73.55$ 0.87-$ 3.76-$ 42.30$ 20.28$ 13.74$ 15.33$ 16.62$ 17.53$ 18.01$

WACC 5.44%TaxRate 26.74%PresentValue 13.03 13.79 14.17 14.18 13.81

TerminalValueGrowthRate 2%TerminalValueasof31/12/2018 533.16$PVasof31/12/2013 408.95$TotalEnterpriseValue 477.93$

(-)FairValueofDebt 64.19$(-)MinorityInterest 0(+)Cash&CashEquivalents 16.417EstimatedMarketCap($MM) 430.17$

SharesOutstanding 27,186,768 PriceperShare 15.82$

RevenueGrowthRate 8.6% 2.4% 11.5% -3.7% 10% 8% 6% 4% 2%Margin(as%ofRevenue)CostofSales 64.7% 60.5% 62.5% 62.4% 63.2% 62.7% 62.7% 62.7% 62.7% 62.7%Marketing&Advertising 4.2% 5.3% 4.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%Research&Development 3.4% 3.3% 3.8% 3.9% 3.8% 3.6% 3.6% 3.6% 3.6% 3.6%Selling,Distribution,&Admin.Expense 26.0% 25.9% 21.9% 20.9% 20.8% 23.1% 23.1% 23.1% 23.1% 23.1%



APPENDIX8:MEGABRANDSWACC

WeightedAverageCostofCapital=5.44%

APPENDIX9:POTENTIALVALUEOFSYNERGIES

ValuesinUS$millions.ThevaluepershareinCanadiandollarsisC$23.73

Cost of Equity - Capital Asset Pricing Model Risk Free Rate 2.865% 10 year Government of Canada BondsBeta 0.701 Obtained from Bloomberg. Beta less than 1 indicates company is less volatileMarket Return 6.87% 10 year average return of the S&P/TSX IndexCost of Equity 5.67%

Settlement Date 31/12/2013Maturity 30/03/2015Price 105.39$ Coupon 10%Frequency 2Yield / Cost of Debt 5.45%Tax Rate 26.74%After Tax Cost of Debt 3.99%

Company conducted a private placement of secured debentures in 2010. Based on the company's recent partial redemption of the bond, a price of $105.39 isestimated and used to calculated the current yield. Given that these bonds are private, no market value of debt is currently available and no fair value isdisclosed.

Fair Value of Debt 64.19$ Company redeemed $53.8 million in principal amount of debentures and recorded a $2.9 million charge. This amounts to a 5% premium added to the face value of $61.13 million.

Fair Value of Equity 413.51$ Based on 2013 year ending share price of $15.21 and fully diluted shares of 27,186,768Total 477.70$ Percent of Debt 13%Percent of Equity 87%Total 100%

Stand-AloneMarketCap 430.17$

Increasedrevenueasaresultofaccesstonewmarketsanddistributionchannels 59.26$LowerMarketing&Advertisingby1%eachyearforthenext5years. 21.92$LowerSelling,Distribution,&Admin.Expensesby1%eachyearforthenext5years. 112.46$Synergies 193.64$TotalValue 623.81$ValueperShare 22.95$



APPENDIX10:STOCKPERFORMANCE

(YahooFinance,2014)

Toy companies have come under pressure over the last year andMattel has lagged. The acquisition ofMEGABrandsbringsanewmarketandopportunitiesofscaletothecompany.

(MSNMoney,2014)

-40%

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0%

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60%

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120%

Jan-2012 Mar-2012May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014May-2014

Percen

tCha

nge

SharePriceComparisonMattellvsMegaBrands

MATTEL MEGABRANDS S&P500



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