When toymaker Jakks Pacific Inc. announced last week it had signed a deal with the Ultimate Fighting Championship league to develop action figures of popular fighters, analysts saw the move as a surprising comeback punch.
Just three months ago, the Malibu-based Jakks lost a major revenue source when World Wrestling Entertainment Inc. decided to move its action-figure license to Mattel Inc. in El Segundo. Although Jakks quickly returned fire with the announcement of a license with TNA Wrestling Inc. it was little consolation. TNA stands for the little-known Total Nonstop Action league, a fledgling rival of the dominant WWE.
Meanwhile, the deal with the suddenly popular UFC a "Mixed Martial Arts" combat sport that combines punching, kicking and wrestling looks like the company's back in the fray.
"It's a great deal for them," said Arvid Bhatia, an analyst with Sterne Agee Financial Services Inc. "When you combine TNA and UFC, they should for the most part replace the revenues they will lose from WWE. So investors should be less concerned about the loss."
Edward Woo, an analyst with Wedbush Morgan Securities in Los Angeles, estimates that the two new deals will recover about 50 to 65 percent of the revenues lost from WWE.
"Without knowing the numbers, I would say this is closer to a big deal than a small one for Jakks," he said.
The four-year agreement gives Jakks a license to develop a line of UFC dolls that will launch in 2009. Besides big-name fighters including Chuck "Iceman" Liddell and Anderson "Spider" Silva, the license also allows the company to make toys based on the trademarked octagonal ring where the fighters engage in battle.
But most significantly, Jakks has caught UFC just as its popularity is spreading from fringe-group fans to the mainstream culture.
"It's a trend-based business and we deliver on those trends," said Jeremy Padawer, vice-president of branded entertainment at Jakks. "The growing popularity of UFC heavily influenced my decision to approach them in the first place."
Dana White, president of Las Vegas-based UFC, said the company that runs the combat sport selected Jakks from a competitive field.
"We talked to a lot of different companies when we did this deal, and Jakks were the people we wanted to go with," White said. "As we've built this business, doing a merchandising deal like this with a major toy manufacturer has been one of the biggest goals. These guys are one of the top three action figure toy companies in the world."
Padawer said the talks started about 18 months ago. UFC liked Jakks' strategy of producing "the whole line," meaning eventually the company will make figures of all UFC fighters, not just the superstars. He was impressed that when Jakks did Pokemon toys, the company produced all 500 of the fantasy characters.
"UFC's enormous and growing popularity amongst adults, coupled with the extensive roster of physically powerful star fighters, gives Jakks a substantial base to work with," said Stephen Berman, Jakks president. "Our objective is to give collectors an authentic UFC experience."
Padawer declined to discuss the deal's financial impact on Jakks, saying that for now the company is focused on delivering well-made UFC figures for collectors and fans.
The U.S. action figure market is worth about $1.5 billion each year, with a little more than one-third of that total coming from male buyers 15 years and older, Padawer explained. That older segment of the market overlaps with the audience for UFC's weekly show on Spike TV. The league also does pay-per-view TV events.
The company claims the UFC show gets higher ratings than some basketball, hockey and NASCAR events and is especially popular among 18- to 34-year-old males.
Jakks will produce two lines of figures, based on the two functions of toys play and display. The mass merchandise version will cost between $7.99 and $17.99 each, aimed at the play market. A high-end collectible version will feature real cloth costumes and authentic detailing with a price tag "that could be $100 and up," said Padawer.
The day following the UFC announcement, Jakks stock rose 3.4 percent, but it later fell back to pre-announcement levels. The stock currently trades for around $23 on the Nasdaq.
Despite the company's bounceback from the WWE loss, Bhatia gives Jakks a "hold" rating, based on a lingering lawsuit with WWE. The suit alleges a bribery scheme involving Jakks executives and employees of THQ Inc., the software publisher in Agoura Hills, to strike a deal for a video game. The suit was originally filed in 2004. Bhatia said it is the only cloud over the company.
"The company is fundamentally doing well," Bhatia said. He maintains a target price of $30 per share for Jakks.
Woo sees a brighter future for Jakks because of a lower price-earnings ratio compared with other toy companies. Jakks has a P/E of 8.5, compared with 14 for Mattel and 18 for Hasbro Inc. "I have the company rated as a buy on a relative valuation basis it's a lot cheaper than its peers," he explained.
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