Mattel’s Bitter Lesson Written in Red Ink: Learning Co. Is for Sale

Mattel Inc. said Monday it is trying to sell its troubled Learning Co. operations, which a year ago cost the company $3.6 billion to acquire and two months ago cost its chief executive, Jill Barad, her job.

The ailing maker of educational software could fetch as little as $200 million, only about 5% of what Mattel paid for the Bay Area company, and possibly less than what Learning Co. has lost since joining Mattel, one Wall Street analyst estimated.

Because of ongoing operating losses--Learning Co. is expected to add $150 million in red ink this year on top of last year’s roughly $300-million deficit--”we do not believe that the underlying assets at TLC are ‘premium’ assets,’ ” said Jill Krutick, an analyst with Salomon Smith Barney.

Krutick, in a report issued Monday, valued Learning Co. at $200 million to $500 million, based on revenue of $580 million this year. Mattel paid a premium of more than four times Learning Co.’s earnings.

Analysts nonetheless offered lukewarm praise for the planned sale, saying the El Segundo-based toy maker is better off cutting its losses and focusing its efforts on its core toy business. Learning Co. is the owner of computer titles such as “Carmen Sandiego” and “Myst.”

In New York Stock Exchange trading, Mattel gained 44 cents, to $10.94. Last month, the shares hit a seven-year low of $9.06.

Mattel last month began a $75-million to $100-million restructuring of its interactive unit, which is expected to eventually include the elimination of about 650 jobs and closure of at least 15 of the division’s 20 facilities.

“I think they just wanted to get out from under something that has been a drag on morale, earnings and probably a drag on getting someone to come in,” said toy industry analyst Sean McGowan of Gerard Klauer Mattison in New York.

Unloading Learning Co. also could ease Mattel’s efforts to find a new leader, Krutick said. Mattel had been laboring under thin management ranks even before Barad’s departure in early February, after several key executives left the company. After Barad, President Ned Mansour departed, ending a 21-year career at Mattel.

Board members William D. Rollnick, 67, and Ronald M. Loeb, 66, have served as Mattel’s interim leaders since Barad’s departure.

When Barad announced the purchase of the Learning Co. in late 1998, analysts were critical of what some said was too rich a price to include “new” technology in Mattel’s “older” business, which includes the venerable Barbie and Fisher-Price toy lines.

At the time, Barad forecast a $50-million after-tax profit for Learning Co. That prediction proved to be wrong by the third quarter of 1999, when Barad warned investors that Learning Co. would suffer an after-tax loss of $50 million to $100 million and a 2% to 4% revenue decline.

The announcement proved to be the first in a series, as Learning Co. continued to drain Mattel’s profits and sink its stock.

Mattel lost $18.4 million in last year’s fourth quarter, which toy retailers and manufacturers count on for as much as half of their revenue because of the holiday season. Learning Co. alone lost $183 million in the fourth quarter, causing Mattel to post an $82.3-million loss in 1999, its first annual deficit in more than a decade.

Learning Co.’s business will be treated as a “discontinued operation” beginning with Mattel’s March 31 financial reports, the company said.

Mattel added that a Learning Co. sale would not include any Mattel properties. Credit Suisse First Boston Corp. is handling the sale.