Fitch Affirms Mattel's 'A-' IDR and Stable Outlook on Acquisition Announcement

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CHICAGO--(BUSINESS WIRE)-- Mattel, Inc. (Mattel) announced today that it has agreed to purchase HiT Entertainment Ltd (Hit) for $680 million in cash. The transaction is expected to be funded mostly with debt and is expected to close in the first quarter of 2012. Fitch Ratings notes that the acquisition is not expected to have more than a modest impact to Mattel's more than $6 billion in revenues but should help the bottom line as HiT's licensing-based business would carry higher EBITDA margins than Mattel's average. Further, as the intellectual property owner, Mattel can provide the related toys for other expiring licenses. The transaction is subject to anti-trust clearance and other customary closing conditions.

Fitch had previously noted that there was room in Mattel's ratings to moderately increase leverage (debt/EBITDA) to near 1.4 times (x). Fitch also noted that the company was expected to remain prudent with regard to acquisitions and share repurchases such that while leverage could temporarily exceed these levels it would revert back within 18 months. At Sept. 30, 2011, leverage is estimated to be near 1x. On a pro forma basis, even if the acquisition is completely debt-financed, leverage is likely to remain near 1.4x.

Mattel's low leverage and considerable liquidity support its strong credit profile. Equally important is Mattel's longstanding financially conservative policies designed to maintain a strong balance sheet and healthy cash flow. Mattel has demonstrated fairly steady performance over a long period of time. Except for 2008 when commodity prices spiked rapidly, its free cash flow has been positive in each of the past 10 years and averaged $364 million. Free cash flow is expected to remain robust in the $300 million range. Leverage has not exceeded 1.4x in 10 years. The stability shown by this track record mitigates the key industry risks of seasonality, retailer concentration and fashion risk that would normally be associated with smaller, more levered companies or those with a limited and less diversified product portfolio.

The ratings also encompass the pressure on margins from a heightened commodity cost environment, potential for China currency appreciation and future double-digit wage increases. The $315 million judgment related to the Carter Bryant/MGA Entertainment, Inc. (MGA) litigation is also considered. Fitch expects that the company will offset much of the manufacturing cost increases through cost savings or productivity improvement programs and price increases. Mattel has already executed a high single-digit price increase effective April 1, 2011. The company also has the financial flexibility to address unplanned-for events, such as the significant adverse judgment, although its public financial targets such as debt/capital of 25% and $800 million in cash at year end might suffer in the short term.

The Stable Outlook is based on Fitch's expectation that the company will continue to demonstrate solid revenue and operating profit growth in a challenging cost environment while maintaining strong credit measures with leverage at or under 1.4x, its public financial targets, and double-digit interest coverage. Fitch expects that the company will remain prudent with regard to acquisitions and share repurchases.

Revenues for the nine months ended Sept. 30, 2011 increased 10% to $4.1 billion paced by international market penetration, support from the theatrical release of Cars 2, and the recent high single-digit price increase. Cost control efforts, particularly on the SG&A front, yielded operating income growth of 15% to $544 million. As is typical at this seasonal peak, cash flow from operations was negative at $322 million, but far less so than the $428 million negative amount seen last year.

Mattel has considerable liquidity of almost $1.7 billion even at this seasonal low point comprised mainly of $1.4 billion in an undrawn revolver maturing in March 2015. Debt maturities are modest with $50 million due in 2012 and $400 million in 2013. There are no further debt maturities until 2020.

Fitch currently affirms Mattel's ratings as follows :

--Issuer Default Rating (IDR) at 'A-'';
--Unsecured bank facility at 'A-';
--Senior unsecured notes at 'A-'.
--Short-term IDR at 'F2';
--Commercial Paper program at 'F2'.

The company had approximately $950 million in total debt which consists entirely of unsecured notes at Sept. 30, 2011.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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