Spin Master: Acquisition of Melissa & Doug Promotes Significant Growth in Preschool Category

On Oct. 11, no-moat Spin Master TOY announced it will pay $950 million for Melissa & Doug, a premier brand catering to the infant, toddler, and preschool category focused on eco-friendly inputs and screen-free play. We believe Spin Master has an opportunity to capitalize on the underutilization of the Melissa & Doug brand, elevating the line internationally and expanding into new areas like publishing, providing a solid road map for growth. However, we remain cautious on the infant, toddler, and preschool industry, given that it has grown at an average annual rate of around 2.5% over the last decade. Even leading brands like Fisher-Price (owned by narrow-moat Mattel) have failed to generate growth in four of the last five years.

While this acquisition is considerably larger than Spin Master’s usual tie-ups of less than $100 million, we don’t foresee any issues that would derail it. The acquisition price represents an 8 times adjusted enterprise value/EBITDA multiple, including synergies, and less than 2 times sales, in line with historical deal levels. The transaction will be financed through $450 million in existing cash and $500 million from new debt, leaving Spin Master with less than 1 times net leverage when the transaction closes in 2024 and providing flexibility in the capital structure.

Although Melissa & Doug’s revenue is around 24% of Spin Master’s 2022 sales, we expect the incremental top-line lift to be offset by integration expenses. Indeed, Spin Master expects Melissa & Doug to be accretive to EPS at a midteens rate in 2024 when including run-rate savings (which aren’t set to be achieved until 2026). We expect 2024 profits will be crimped by higher administrative expenses and marketing, distribution, and debt-service costs, although these factors should normalize over time. For now, we expect the tie-up to improve our CAD 50 fair value estimate by around CAD 2-CAD 3. We still view the shares as significantly undervalued.