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Nov 20, 2017

S3 Analytics: Buy Play-Doh not Mattel if you want a Short Squeeze

Hasbro Inc.’s (HAS) takeover bid for its main competitor Mattel Inc. (MAT) pushed up the stock prices of both stocks by 5% and 26% respectively. According to Reuters, Mattel has rejected Hasbro’s offer stating that it undervalues the company and CEO Margaret Georgiadis may be looking to “drive a hard bargain” in the negotiations.

Mattel and Hasbro are both in the top five most shorted stocks in the Leisure Products Sector with $605 million of increased short exposure in both stocks combined since November 10th. With both stocks rallying since the announcement on the 10th, short sellers were down $407 million in mark-to-market losses over the last week and a half.

The Mattel short trade may become a binary event, if it’s true that Mattel believes Hasbro’s initial takeover offer was insufficient there may be another bump-up in Mattel’s stock price as Hasbro sweetens its offer and short losses will increase. However, if Mattel unconditionally rebuffs Hasbro’s takeover attempt its stock price will decline to pre-offer levels or lower and shorts will recoup some or all of their recent losses.

There have already been cries of “short squeeze” regarding Mattel’s short position, but there has been no evidence of a material amount of short shares leaving the trade after Mattel’s recent stock price increase.  Total shares shorted are virtually flat in November, 76.8 million shares short on October 31st versus 76.6 million shares on November 17th.

Mattel short sellers are down $366 million in losses over the last week and a half, which took a sizable bite out of the $460 million in mark-to-market profits they had prior to the announcement. Mattel short sellers took a Mike Tyson-like hook to the body on the open on November 13th, with no chance to cover their shorts anywhere near Friday’s closing stock price.  But having weathered the punch and already having incurred their mark-to-market losses there is not much reason to close the barn door after the horses have bolted and exit their positions.

If the probability that Hasbro increases their Mattel offer we can expect a portion of the $1.4 billion of shorts to cover their positions, but at the moment the only Mattel squeeze we are seeing is being done to their Barbie dolls.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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