TORONTO — The company best known for the kids' cartoon "Paw Patrol" is betting its acquisition of a U.S. toymaker specializing in wooden games and toys will broaden its appeal with parents limiting their children's screen time.
Toronto-based Spin Master Corp. announced on Wednesday it has signed a US$950 million deal to buy Wilton, Conn.-based Melissa & Doug, which is known for its nostalgic, pretend-play toys for preschoolers.
"The acquisition of Melissa & Doug represents a significant step forward in our growth strategy and will help support our vision to reimagine everyday play," Spin Master chief executive Max Rangel said during a news conference.
He said the acquisition will be an important new brand within Spin Master's infant and preschool toddler group.
Doug Stephens, the founder of Retail Prophet, said Spin Master may be sensing resistance from parents toward digital toys and games, and felt the need to diversify.
"There's somewhat of a revival of old-school wooden toys and games that require more engagement of motor skills and imagination as more research from educators and neurologists point to the potentially negative effects of digital toys," he said.
Spin Master is best known for its Paw Patrol, Bakugan, Hatchimals, Rubik's Cube and Gund brands.
Lisa Hutcheson, a retail strategist and consultant with J.C. Williams Group, agreed that the acquisition allows Spin Master to tap customers seeking non-digital entertainment for children.
"Being able to have a brand that is screen-free is a way to expand their market," she said.
"It is a way for them to be able to understand their customer more by being able to have this new touchpoint."
Spin Master said Melissa & Doug will continue to operate as a standalone business with current CEO Fernando Mercé staying on in that role.
“We are committed to preserving the essence of what Melissa & Doug represents for families and continuing to operate it as a standalone company while working together to inspire more children through the magic of play," Rangel said in an email.
National Bank of Canada analyst Adam Shine said in a note to clients that the acquisition is expected to boost Spin Master's earnings per share in 2024.
He said Spin Master is expected to see immediate growth opportunities through e-commerce and international expansion and that there is more growth to come from Melissa & Doug's core product line.
"It's a highly recommended brand with strong consumer loyalty and has achieved sustained (sales) performance ahead of the overall toy market over the past five years," he said in a note to clients.
Melissa & Doug had US$489 million in revenue last year, Shine said, and generates about 75 per cent of its sales from toys launched in 2017 or earlier. It has 600 employees.
Spin Master said in its release that the deal has the potential for run-rate cost synergies of about $25 million to $30 million, which is expects to achieve by 2026.
Mark Satov, founder of business consulting firm Satov Consultants, expressed skepticism over Spin Master's push for cost savings with the acquisition.
"They're going to leave the operations of Melissa & Doug alone, which doesn't speak to synergy," he said.
"When you look at Melissa & Doug's revenue and the fact that a lot of their revenue comes from toys launched more than six years ago, it points to the need to invest in development," Satov added.
He said continuing to develop at Melissa & Doug as a standalone business will be more expensive than combining the two companies.
"Something doesn't add up," he said.
Spin Master said it's going to explore adjacent categories like baby and toddler products, with future plans to expand into areas such as publishing.
The company plans to finance the purchase price with about $450 million in balance sheet cash and $500 million in debt financing.
The agreement also includes up to an additional US$150 million that is subject to achieving certain financial targets for 2024 and 2025.
Earlier this month, Spin Master announced an agreement for the global toy licence for Dora, the new reboot of the Dora the Explorer franchise coming next year.
The new Dora toy collection is expected to launch in the fall of 2024 and include figures, dolls, playsets, vehicles, plush, role-play, games and puzzles, inspired by Dora, her companion Boots and other characters.
This report by The Canadian Press was first published Oct. 11, 2023.
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Ritika Dubey, The Canadian Press
