Barbie and Thomas make friends as Mattel seals $680m acquisition

US toy giant buys Britain's leading children's TV company, reports James Thompson

Bob the Builder and Thomas the Tank Engine have made new friends with Barbie after Mattel – the world's biggest toy maker – acquired the British TV production company Hit Entertainment for $680m (£427m) in cash.

Mattel, which also operates Fisher-Price toys, has agreed a deal to buy Hit Entertainment and its intellectual property and marketing rights from a private equity fund led by Apax Partners, following a protracted auction process that kicked off in March.

Robert Eckert, the chief executive of Mattel, said: "Mattel is the right home for Thomas & Friends."

However, the price paid by Mattel falls way below the reported valuation of Hit when details of the auction process first emerged last year. Indeed, Apax bought the operator of the pre-school brands in a £490m deal in 2005, which would have equated to nearly $900m at that time.

The new deal does not include Hit's interest in the cable network station Sprout. But it will allow Mattel to expand Hit Entertainment's brands, which also include Fireman Sam, Pingu Angelina Ballerina and Barney in emerging markets such as China.

Thomas & Friends is Hit's premier brand and accounts for nearly 80 per cent of its profits. Mr Eckert said: "Thomas & Friends routinely ranks among the world's leading preschool toys."

More than half of the revenues from Thomas & Friends are generated from non-toy products.

Frederique Tutt, a toys analyst at NPD Group, stressed the importance of new media, such as TV channels, with the Hit deal for Mattel.

He said: "Kids nowadays live in a world where media and new media play an important role, so to keep a character relevant, the owner needs to have a multimedia approach and create content for the character to stay top of mind with children. Mattel's move on Hit Entertainment with Thomas the Tank Engine in its portfolio – Mattel is already master toy licensee for Thomas – is another step towards this new shaping up of the kids' entertainment market and should strengthen Mattel's position, not only in the toy business but outside it in the entertainment industry alongside Disney and other big studios."

The $680m price paid by Mattel equates to an earnings multiple of 9.5 times underlying earnings at Hit, which has annual revenues of $180m. Mattel , based in El Segundo, California, employs 31,000 in 43 countries and has worked with Hit for a number of years. Under existing licences, Fisher-Price already makes Hit's toys and Mattel markets many Thomas & Friends toys globally. While Mattel's global sales for Thomas & Friends' die-cast and plastic toys are above $150m, the acquisition will allow Mattel to add the licence for wood-based toys when that licence expires at the end of 2012.

Mattel, which will fund the acquisition with a combination of cash and debt, said it expected the deal to close in the first quarter of 2012, subject to expected anti-trust approval.