Topps Co.'s private equity owners' exit from their investment is as dependent on the success of a digital strategy as the sports trading card and collectibles company is.
"The difficulty in the [trading card] space in the last 10 years has been the transition of consumers to digital platforms," said Joost Van Dreunen, the CEO of SuperData Research Inc., a New York-based research firm focused on the digital, mobile and social gaming industries.
But, Van Dreunen added, Topps could be a great fit within a larger traditional video game publisher depending on the growth and success of its digital products.
"They [Topps] have all these licenses and have been able to get all these agreements with sports leagues," he explained. "That's an attractive asset."
Topps, founded in 1938 in Brooklyn as Topps Chewing Gum Inc., offers more than its traditional physical sports trading cards, memorabilia, posters, vintage signs, apparel and other entertainment products. It also operates a trio of virtual sports trading card games on smartphones and tablet devices.
The New York-based company operates three apps. Topps BUNT is the exclusive digital trading card game for Major League Baseball in which users own cards and earn points based on the real-time performance of real-life players. Topps HUDDLE is a digital trading card game for football players. And Topps KICK is a digital trading card game for the Barclays Premier League.
Topps gained an initial foothold in the digital space on July 26, 2011, when it bought digital currency products provider GMG Entertainment for an undisclosed sum. GMG operates as a wholly owned division of the company as Topps Digital Services, through which it houses the three digital apps. Topps BUNT, launched in April 2012 for iOS devices, already appears to be gaining traction; the company on June 4 released the app for Android devices.
Mike Rosenberg, senior managing director of Intrepid Investment Bankers LLC, explained how reliant Topps' future is on its digital strategy.
"It's a great brand, historic brand, well-known to virtually everyone," said Rosenberg, whose Los Angeles-based firm advised science-themed toy company Uncle Milton Industries Inc. on its Feb. 27 sale to KCB Management Inc. for an undisclosed price. "But like many businesses, ultimately they have to compete with an online or digital alternative, particularly in the distribution of products."
When current owners Chicago private equity firm Madison Dearborn Partners LLC and Michael Eisner's Tornante Co. gained control of Topps in the fall of 2007, following an aggressive bidding war with rival trading card company Upper Deck Co. LLC, Topps was comprised of two distinct businesses: entertainment, which included its sports-related trading cards, and confections, such as its Bazooka Joe bubble gum and lollipops.
Topps initially agreed to a sale to Beverly Hills, Calif.-based Tornante, an investment vehicle led by Eisner, the former Walt Disney Co. chairman and CEO, and Madison Dearborn in March 2007. That deal sparked objections from activist hedge fund Crescendo Partners LLC, which said the offer was too low, and prompted Upper Deck to launch a $425 million hostile bid.
Despite Topps' efforts to prevent a deal from happening with Upper Deck, including raising regulatory concerns and questioning whether the bidder had enough financing, the deal gained federal antitrust approval but was ultimately withdrawn on Aug. 22, 2007.
Less than a month later, on Sept. 18, 2007, the $385 million buyout by Tornante and Madison Dearborne was approved.
Madison Dearborn and Tornante own 75% and 25% of Topps, respectively. The company has $205 million in total debt, with $175 million of that being term loans. Some $40 million in debt is due in October 2015, and a $30 million revolver matures in July 2018, according to Bloomberg data.
Since the buyout, however, the market for trading cards has been challenging to navigate, especially when it comes to the collection of cards in years past as opposed to the current practice of collectors using cards in competitions with each other, explained SuperData's Van Dreunen.
Topps' historical model was based on the collection and trading of physical sports-related cards.
Collectors counted on there being a finite number of products out there. But in the digital sphere, one could essentially create an infinite number of cards, Van Dreunen explained.
"That's where Topps has been having a hard time," he said. "It really goes against their whole foundation."
Still, as the market undergoes a shift in mobile gaming to game mechanics that feature more collection and competition, Topps may be find itself in a good position, he added.
"That market is growing, so the mobile gamers are learning the trading card game vocabulary," Van Dreunen said. "The net result: increasing appetite and audience space for card-based game play. That's good for Topps."
That being said, the type of company that could ultimately be interested in buying Topps, Van Dreunen said, is a larger traditional video game publisher such as Electronic Arts Inc.
Electronic Arts spokeswoman Sandy Goldberg declined to comment on Topps or any potential M&A the company may be interested in, but wrote in an e-mail that "EA Mobile is an area of our business that continues to grow," noting that the monthly active players for EA Mobile's titles reached more than 140 million in its first quarter.
"This next quarter, we're looking forward to delivering some new experiences in mobile, so there's certainly more to come," Goldberg added.
Some industry observers aren't sure who'd be a natural buyer for Topps in its current state.
"Exit-wise, there's probably a strategic who might want the distribution," Intrepid's Rosenberg said. "They still have prominent distribution, though hobby shops are not what they once were. And if you're already in the card business, like Pokémon you already have that distribution."
"I just don't think another PE firm is going to buy it," David J. Iannini, CEO of William and Henry Associates, a Los Angeles-based investment firm serving private companies.
Toy companies such as Hasbro Inc. and Mattel Inc., or perhaps a non-U.S. company -- the Japan baseball market, for example, is huge -- might not be completely out of the picture if Topps' owners do pursue a sale, Iannini said, indicating that it would have to be at the right price and depend on the growth of its digital offerings.
Other factors continue to favor Topps, sources said, pointing to its exclusive rights to make and sell cards with Major League Baseball's logos and players. The company secured its exclusive license agreement with the MLB on Aug. 6, 2009, and on March 18, 2013, announced it had extended the agreement through 2020.
The deal with the MLB has helped eliminate much of Topps remaining competition, including Upper Deck and Panini America Inc., which in previous years had also produced versions of baseball trading cards.
While it continues to hold spokesmen agreements with players, including Michael Jordan, Wayne Gretzky, Tiger Woods, LeBron James and Rory Mcllroy, Upper Deck is largely concentrated on the entertainment-related products, including trading cards and memorabilia such as its Hello Kitty and Marvel Legendary game.
Officials from Madison Dearborn, Tornante and Topps declined to comment.
Geoffrey F. Aronow joined Sidley Austin LLP as a partner in the global securities and derivatives enforcement and regulatory practice. For other updates launch today's Movers & shakers slideshow.
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