Toy business attracts private equity as kids go green and retro

Wed Apr 8, 2015 12:11pm EDT
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By Jilian Mincer

NEW YORK (Reuters) - Striding confidently through Matty's Toy Stop in Manhasset, New York, Catie Tepedino, 7, is the sort of consumer who may hold the fate of the U.S. toy business in her own little fists.

Finding that her top toy choice, Shopkins - tiny grocery store characters made by Australia's privately-held Moose Enterprise – was sold out, Catie went directly to the Barbie row and picked out one of Mattel Inc.'s iconic dolls. Next stop: the arts and crafts section, where she selected an Alex Brands jewelry-making set.

"I know the aisles here," the petite brunette confided as she navigated the store along with her mother, Victoria. And knows what she wants as well: the Tepedinos spent perhaps five minutes shopping, not counting the time spent answering a reporter's questions.

Catie's preferences are a good indication of the state of the toy business. Though Mattel, Hasbro and Lego control about 40 percent of the U.S. toy market, there's a growing niche for smaller companies such as Alex Brands that sell educational or environmentally friendly toys to delay the seemingly inevitable demand for electronic devices.

That, in turn, has attracted investments from private equity companies including Propel Equity Partners of Greenwich, Connecticut, which since 2012 has been building a toy empire off of retro and "green" brands, buying at least 10 companies to date and bringing them together under the name Alex Brands. Other PE firms active in the sector include Winona Capital, the Friend Group and Topspin Partners.

Propel's Alex Brands portfolio includes well-known older toy names, including Slinky and Shrinky Dinks, as well as newcomers such as Citiblocs, which makes wooden construction toys. Both categories represent a trend among parents nostalgic for their own toys and keen on environmentally-conscious products, and have helped weaken the grip of mainstream manufacturers such as Mattel and Hasbro.

More toy company deals are expected in 2015, according to Reuters interviews with private equity firms. Targets may include Dallas-based KidKraft, which makes wooden toys and furniture, industry experts said.

"There are times kids do other things" besides play with electronic devices, Alex Brands CEO Neil Friedman, 67, told Reuters. "We have things for them to do that make them creative and active." Friedman joined Alex in October as CEO after holding senior roles at Toys R Us and Mattel.   Continued...

Betty James, wife of Slinky creator Richard James, displays a 50th anniversary gold commemorative edition of the Slinky toy at a press conference in New York in this March 21, 1995 file photo. REUTERS/Peter Morgan/Files