Geoff Gannon March 6, 2007

Topps to be Acquired by Eisner and Others

Today, Topps (TOPP) announced it has agreed to be acquired for $9.75 per share in cash in a transaction valued at $385.4 million. The maker of trading cards and confections (Ring Pop, Push Pop, Bazooka gum, etc.) will be acquired by the Tornante Company and Madison Dearborn Partners. The Tornante Company was founded in 2005 by Michael Eisner – it is privately held.

Topps was founded in 1938. Although it was always a chewing gum company, Topps didn’t start selling the products it would become best known for until after the war. Following World War II, the company developed Bazooka Bubble Gum. In 1951, Topps added baseball cards.

The company had annual sales of $298.84 million in fiscal 2006. Topps derives roughly half of its total revenue from each of its two business segments – 49.1% from confections and 50.9% from entertainment.

Total sales have been stagnant for some time now. Sales actually declined slightly during 2005 and 2006. Although sales have grown over the last twelve months (to over $300 million), the company is still far short of the $439.3 million in net sales it registered six years ago.

That recent high water mark was set during the height of the Pokemon craze in 2000 – when those little Japanese monsters brought in $179.6 million (or 40.88%) of Topps’ $439.3 million in total sales. In a single year Pokemon sales plummeted by $155.5 million or 86.58%.

Here it seems right to add (with apologies to Matthew) that all those who live by the fad die by the fad.

As you might expect, Topps had dealings with Disney (DIS) during Eisner’s reign. Whether this previous experience played any part in Eisner’s decision to invest is anybody’s guess.

In the press release announcing the deal, Eisner said only this:

“Topps is a wonderful company with a powerful brand portfolio and a rich history. Topps’ management team and employees are the best in the business, and we look forward to working with all of them to grow the company in new and exciting ways.”

According to the press release, Lehman Brothers served as sole financial advisor to Topps.

In February of 2005, the board of Topps “authorized the company to pursue, with the assistance of Lehman Brothers, a sale of the candy business, believing such a step might provide value for the stockholders, in light of recent industry transactions at attractive multiples.”

It seems Lehman did one better.

The always interesting 24/7 Wall Street has a post on the Topps deal written by Jon Ogg.

This just inCrescendo Partners Said Topps Buyout Offer is Inadequate

Director Arnaud Ajdler has written a letter to the board which includes these fighting words:

Since the Board of Directors has decided to pursue this transaction over the significant concerns which I have continually and repeatedly voiced to the Board, I intend to actively solicit votes and campaign against the proposed transaction.

I’ll post on this story as it develops (and I have some time to digest it), but for now let me just say that this offer doesn’t come with much of a premium and Topps has a balance sheet loaded with cash. In fact, the balance sheet is obscene for a public company.

Unless Topps has recently entered the reinsurance business, I don’t see any reason for it to hold that kind of investment portfolio against liabilities that are almost non-existent.

I have to look over the company’s financials tonight, but it looks like the market cap overstates the actual cash cost of purchasing Topps by 25-33% or thereabouts. In other words, it seems an acquirer would be getting “cash back” of about twenty to twenty-five cents per dollar spent buying the company.

If that’s true, we do have a problem here. Topps’ executives have managed a good brand quite badly for years – now, it looks like they may be doing as poor a job selling the company as they’ve done running it.

For now I’ll hold back on spewing any real venom. I need a night to think on the situation before I tell you how I really feel.

If you happen to hold Topps shares – do everyone a favor and don’t sell them today. It’s likely to be the wrong decision both financially and morally.

Note: Before writing more, I’m interested in knowing what actual owners of Topps shares think about this deal. If you’re an owner of Topps shares please take the time to send me an email with your thoughts.

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