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By: Giedrius Daujotas

Mattel has announced the acquisition of British media company HIT Entertainment for a cash sum of US$680 million. Through this acquisition, Mattel will effectively become the owner of multiple media brands including Thomas and Friends, Bob the Builder, Fireman Sam, Barney, Angelina Ballerina and Mike the Knight.

Thomas and Friends is undoubtedly the most important part of the deal. It has been the most popular pre-school brand in the world for almost a decade, and according to estimates released with the deal, Thomas accounted for around 80% of HIT Entertainment’s profits last year.

An additional important detail is that the Thomas brand has wide geographical appeal, having reached number one pre-school licence status not only in the UK and the US, but also in China, Japan and Korea.

So, how will the acquisition change the competitive landscape of the toys and games industry?

What does the deal mean for Mattel?

HIT Entertainment is Mattel’s largest acquisition in almost a decade. The previous acquisitions of the world’s largest toymaker included an unsuccessful attempt to diversify with The Learning Company at the height of the dot-com bubble in 1999 (Mattel sold the company at a huge loss only a year later), American Girl in 1998 and Fisher-Price in 1993.

The cross-licensing of toy brands is currently a key trend in the toys and games industry as toymakers have put more emphasis on own brand creation and are looking for ways to expand their brands outside the traditional toys and games.

While Mattel has always been less active in this area than Hasbro, the acquisition suddenly puts it at the forefront of the industry, with a brand that has been very successful outside toys. Mattel will be able to apply the expertise of the Thomas franchise to its range of other brands, as well as bring its own expertise to further boost Thomas sales.

On the side of traditional toys, Mattel has acquired a strong brand and has potential to boost its sales in all regions, but particularly in Asia Pacific. Thomas will help its Fisher-Price, Hot Wheels and Matchbox brands. Mattel has already put a number of new Thomas and Friends products on the market, such as the Thomas and Friends-branded Fisher-Price TrackMaster and the Take-n-Play portable railway.

What does it mean for the toy industry?

The immediate question for Mattel following the acquisition will be what to do with other toymakers that use Thomas and Friends licence. The Japanese toymaker Takara Tomy currently makes a number of Thomas and Friends-branded products under licence which are primarily sold in Asia Pacific. Its Plarail line of trains, for example, has many Thomas products.

Other toymakers, such as Hornby, also have a licence to market Thomas-branded train/model vehicle sets.

Mattel may prefer to retain the licence for its own Hot Wheels and Matchbox brands rather than sell it to other toymakers, particularly in emerging markets where the company is aiming to increase its market share.

While Hornby operates in more of a niche area and is not likely to compete with Mattel directly, Takara Tomy is more of a direct competitor. A helpful coincidence in this case is that Takara TOMY acquired RC2 in March 2011 for US$640m, and some of RC2 properties have strong resemblance to Thomas, such as Chuggington.

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