Jakks Pacific Inc. thinks 2012 will be a very good year. The company is so optimistic about its performance that when an investment management firm recently made the Malibu toymaker a buyout offer, Chief Executive Stephen Berman rejected it, saying it grossly undervalued the company.
After months of private negotiations between Jakks and downtown L.A.-based Oaktree Capital Management, Oaktree launched a hostile takeover with an offer of $670 million in cash. The $20-per-share offer was 25 percent higher than Jakks’ closing price Sept. 13, when the bid was announced. Oaktree, with a 4.9 percent stake, is one of Jakks’ largest shareholders.
In its Oct. 5 response, the toymaker rebuffed the price with a hint of vexation, saying the investment firm was exploiting the economic climate to undervalue Jakks.
“Oaktree is attempting to take advantage of current adverse macro-economic conditions in order to buy Jakks below its intrinsic value,” Berman said in a letter to Oaktree. “This seems to be consistent with Oaktree’s investment strategy.”
Analysts believe Oaktree won’t make a follow-up offer that Jakks will accept.
Neither Oaktree nor Jakks would comment for this article.
Oaktree is headed by Howard Marks, No. 35 on the Business Journal’s list of Wealthiest Angelenos with an estimated personal net worth of $1.15 billion.
The company specializes in distressed debt investments, often taking stakes in companies on the verge of bankruptcy. In recent years, it has invested in a variety of troubled companies, including meat manufacturer Pierre Foods in Cincinnati, Las Vegas casino operator MGM Mirage and cable operator Charter Communications Inc. in St. Louis.
Jakks is based at a prominent Malibu site above Pacific Coast Highway, and is best known for making action figures and role-playing games.
Analysts say Jakks’ rejection is the right move because the company’s products for 2012 look better than those for last year and this year.
The company’s traded as high as $24.79 in August 2008, but fell to $10.93 in January 2010. It was trading last week at about $18.
“I can speculate that they believe the products they have for the near term will get the stock price up,” said Edward Woo, a research analyst at Wedbush Securities in downtown Los Angeles.
Some of these new products, which were unveiled at a presentation for analysts in Santa Monica last week, left researchers like Scott Hamann of Cleveland’s KeyBanc Capital Markets glowing. In his analyst note, Hamann wrote that “with a slew of exciting initiatives for the next few years, we believe the risk/reward remains compelling” and that the value of Jakks is “more than the recent $20-per-share unsolicited cash offer.”
First TV venture
One of the promising new lines is Monsuno, a mythology-driven boys’ action figure and collectible series in the style of Pokemon. The toys are slated to debut in the spring and will be accompanied by a cartoon on Nickelodeon – Jakks’ first TV venture.
In his letter to Oaktree, Berman cited Monsuno as a major reason the company’s stock price will rise and that the offer was too low.
“We believe the Monsuno project and the skill set and key relationships that have been developed to bring it to fruition will lead to similar proprietary projects that should have a positive impact on our share price,” Berman wrote.
Jakks is also expanding its technology-driven products, such as Spy Net and the I Am T-Pain Microphone, as well as items for girls. The company recently got a license to make toys based on the hugely popular Winx Club girl-targeted TV show and toy series.
“(Jakks) did a good job of convincing me of the opportunities they have for next year,” Woo said. “That’s what they needed to do to convince their shareholders why they didn’t sell out for $20 per share.”
What’s more, Jakks in August acquired Moose Mountain Toymakers Ltd., a Hong Kong maker of licensed arcade-style games and children’s vehicles. The move is expected to help Jakks expand in the Asian market.
“They have a good holiday coming up,” said Arvind Bhatia of Sterne Agee in Dallas. “Management’s view is that they’ll get some benefit this year, but mostly they’ll benefit next year.”
Analysts say the expected growth and robust holiday season is one reason Oaktree pursued Jakks aggressively during the past few months. If the firm had waited any longer, the offer would have had to go higher.
“Putting an offer out there before these guys can execute their holiday plans and bring out Monsuno – the timing of it was purposeful,” said Gerrick Johnson, an analyst at BMO Capital Markets in New York. “If they waited six months, Jakks would have had the opportunity to report two more quarters of earnings – and those earnings might be strong”
The reasons behind Jakks’ rejection of Oaktree’s offer go beyond the price, however.
According to analysts who follow the toymaker, other aspects of the bid were problematic. For one thing, Oaktree’s offer was conditional, meaning it could back out at any time if financing didn’t come through. Jakks was reluctant to expose itself to such uncertainty, Bhatia said.
“The knowledge and information and trade secrets in a deal like this – you don’t want to be exposing those to someone who might walk away,” he said.
Furthermore, some analysts believe that Oaktree would shake up the Jakks management team, although others say that wouldn’t happen.
Oaktree thinks the company could be run more efficiently, Johnson said, with better attention to costs and product development.
“There’s a specific person that Oaktree has in mind to run this company should they take it over,” he said. “They think they can grow revenue and margins at a faster rate.”
But Bhatia and Woo disagree, saying there wouldn’t be major changes to management.
“This is a creative business for the most part, and you’d want to have most of the same team in place,” Bhatia said.
Overcoming problems
Though Jakks’ future looks bright, the toymaker had setbacks in the past few years, leaving it undervalued, analysts say.
In 2009, the company laid off 100 workers, largely because of sluggish demand for toys in the recession. The following year, the company lost a licensing deal for popular World Wrestling Entertainment action figures to Mattel Inc. in El Segundo.
The company reported net income of $76 million in 2008, a loss of more than $385 million in 2009 and net income of $47 million last year. (The 2009 loss included a recall and a noncash charge for impairment.)
Johnson said the company’s current price isn’t an indication of future performance.
“They have a strong enough product line that the earnings will grow over the next six to 12 months,” he said.
He predicts that Oaktree will return with another, slightly higher offer, but not one that would quite reach the $24 mark that analysts believe Jakks is worth. Woo also said there’s very little chance that Oaktree will meet them there.
“Oaktree is a financial buyer and they’re going to be very disciplined in their price,” Woo said. “They only have one reason to buy this company: To sell at a higher price in the future.”
