Mattel Inc. executives announced Friday that they finally found a way to unload one of the worst purchases in American corporate history. But instead of selling the Learning Co. division, for which Mattel paid $3.5 billion a year ago, Mattel opted to give it away.
During an early-morning call with investors and financial analysts, Mattel Chief Executive Robert Eckert said small Los Angeles-based investment firm Gores Technology Group will take software maker Learning Co. off Mattel’s books in a zero-cash-upfront deal.
To account for that arrangement, Mattel will take an after-tax loss of $430 million. Mattel will share Learning Co. gains if Gores Technology either sells the company or brings it to profitability, the company said. In the meantime, however, the division’s losses will no longer be costing Mattel between $700,000 and $1 million per day.
Mattel will reduce its quarterly dividend to recoup some of the $430-million charge, from 9 cents per share to 5 cents, for a total of about $130 million.
Eckert also briefly sketched a cost-cutting plan for Mattel that includes a 10% reduction in the work force, about 350 positions, along with a program to pare manufacturing and other administrative costs. Those efforts will result in an additional $250 million in restructuring charges over the next 2 1/2 years, Eckert said. He added that the restructuring is expected to generate about $200 million in pretax savings.
“The terms of this deal make it quite clear how important it was to this board and this management to get out from underneath this company,” said Sean McGowan, the director of research for Gerard Klauer Mattison in New York.
In exchange for the series of earnings hits, Eckert, who has been on the job since May, gets a much-needed fresh start after cleaning up a mess not of his making. Although approved by most of the board members who continue to steer Mattel, the Learning Co. acquisition was brokered by former Chief Executive Jill Barad, who in February lost her job over Learning Co.'s more than $300 million in losses.
“The key from our standpoint is to stop the cash drain--to sell all of it in one transaction and get this behind us,” Eckert said in his comments to the investment community. “We wanted as good a deal as we could get, considering the market value of this property.”
Gores Technology, led by Alec Gores, is a privately held Los Angeles investment group, which focuses on taking over software companies or divisions, primarily those shed by larger corporations.
As Gores worked over the last several weeks to woo Mattel, the firm faced competition up until the final minutes before the deal was struck from another player with a strikingly similar niche position--Platinum Equity Holdings, also based in Los Angeles.
Gores said Friday that it wasn’t until after the deal was signed that he realized where his competition was coming from. Platinum Equity is led by one of his former employees, Alec Gores’ youngest brother, Tom Gores.
“We’re competitive but the good thing is that we’re a close family and there’s enough to do for everyone out there,” Alec Gores said. “We’ll laugh about it and have a cigar and a drink together tonight over dinner.”
Although Mattel declined to outline the specifics of either its arrangement with Gores or its restructuring programs, sources familiar with the negotiations said Mattel will share in any Learning Co. profit based on a sliding scale that will move down over a five-year period.
If Gores resells the company within a six-month period, Mattel will reportedly share half of the proceeds. That scenario seems unlikely, given that Mattel has tried since April to sell the division. Some deal watchers said that software maker Havas, a U.S. subsidiary of French media giant Vivendi, might still be interested in the business or pieces of it.
Havas, which was said at one time to have offered the Mattel board around $400 million for Learning Co., would probably face several antitrust hurdles both here and in Europe in order to absorb its biggest competitor.
If the property doesn’t sell within five years, during which time Mattel’s share of a sale reportedly drops, Gores will give Mattel a percentage of the company’s value at that time.
Learning Co. began to sink almost as soon as Mattel took over the computer software maker, which owns titles such as “Myst” and “PrintShop.” Barad had said the purchase, which she projected would bring in $50 million in 1999, was crucial to keeping digital-age children connected to the brand that made its name with such low-tech toys as Barbie, Matchbox and Fisher-Price.
Instead, Barad was forced to revise financial projections several times as the problems at Learning Co. grew. In 1999, Learning Co. caused Mattel’s first annual loss in a decade.
Mattel bought the company just as children were trading in their CD-ROMs--Learning Co.'s main delivery method--for games and programs downloaded from the Internet.
What’s more, what looked like strong sales at Learning Co. turned out instead to be a product glut, much of which was eventually returned to the company after it failed to spark interest among consumers.
“Eckert is clearing the decks and cleaning up the cost structure,” said analyst Jill Krutick, of Salomon Smith Barney in New York. “He’s finally gotten his arms around the business and now he’s ready to launch forward with a stronger, more vital company.”
Shares in Mattel fell 13 cents on Friday to $11.50 on the New York Stock Exchange.