Malibu toymaker Jakks Pacific Inc.’s recent announcement that it would issue $100 million in new convertible notes didn’t play well with investors.
Shares of Jakks plunged 12 percent during the week ended June 4 to close at $7.56, making it one of the biggest losers on the LABJ Stock Index. (See Page 42.) The company’s stock is down 28 percent over the last 52 weeks.
On June 2, Jakks announced that it would be offering $75 million in convertible notes. The company raised the size of the offering by $25 million the next day. The notes pay an interest rate of about 4.9 percent and are due in 2020.
About $39 million of the proceeds will be used to pay off existing notes and $25 million will go toward buying back shares, but that leaves $36 million worth of new convertible notes that dilute current shareholders.
“It’s a shift in value from equity holders to convertible holders,” said Linda Bolton Weiser, an analyst who covers the company for West L.A. investment bank B. Riley & Co.
Jakks declined to comment to the Business Journal for this article.
The company gained a higher profile when biotech billionaire Patrick Soon-Shiong, No. 1 on the Business Journal’s most recent list of Wealthiest Angelenos, formed a joint venture with Jakks in 2012 to create a line of toys that interact with smartphones and tablets. He now owns 19 percent of the company.
Jakks, headquartered in a distinctive modern office on a cliff overlooking Pacific Coast Highway, manufactures action figures, electronics and Halloween costumes, among other toys for boys and girls. It is a licensee of entertainment brands such as Nickelodeon, Disney and Nintendo. The company recently enjoyed success with a line of toys based on Disney’s “Frozen,” which have been selling at five- to eight-times initial projections, according to Weiser.
Jakks reported a net loss of $16.3 million (-74 cents a share) for the three months ended March 3, compared with a loss of $27.6 million (-$1.26) in the same quarter a year earlier. Revenue rose 6 percent to $82.5 million.
Weiser said that the offering could help give the company flexibility through the slower summer months, when working capital needs are highest. Jakks runs a seasonal business, with the bulk of manufacturing coming in the summer and fall in order to sell toys over the Christmas season. The company might also have been motivated to lock in these notes at current low interest rates.
“It’s a good environment for issuances of convertible notes and debt right now,” she said. “If you wait longer, you run the risk that interest rates may go up.”
Weiser continues to rate the company a “buy” on what she sees as the strength of its product lines.
