Topps May Still Be In Play (TOPP)

By Glenn Curtis | May 24, 2007 AAA

When I was a kid I used to collect baseball cards. More specifically, I used to collect cards made by Topps (Nasdaq: TOPP). I had a blast flipping the cards and trading them with my friends.

Then one day I happened across a price list and found out that my collection was actually worth some money. Soon after, I became deadly seriously about my hobby, haggling over card prices like a floor trader on a frenzied trading day.

I had a real business going!

But then something happened; a flurry companies started producing baseball cards. A huge supply was created and prices dropped. Incidentally, it also took the fun out of collecting, because it became near impossible to collect all of the cards from all of the various brands on the market.

And so my baseball cards sat collecting dust at the bottom of a closet until I was able to unload the most valuable ones.

The Changing Landscape of The Card Industry
It appears that the baseball card industry might be on the verge of some major consolidation. This past week California-based Upper Deck Company (which makes some sharp looking baseball cards) made an unsolicited bid of $10.75 per share for Topps.

That offer is well north of the $9.75 bid the company received and agreed to earlier this year from The Tornante Company, a private investment enterprise headed by Michael Eisner of Disney (NYSE: DIS) fame and Madison Dearborn Partners.

So, will Topps accept the new offer and jettison its definitive agreement with Tornante and Madison?

For what its worth, earlier this year management chose not to pursue an initial indication of interest from Upper Deck for the same price ($10.75), due to concerns over regulatory hurdles the two firms would have to overcome, and a lack of information about whether Upper Deck would have the means to finance such a deal.

But again, this is a new offer, and it's accompanied this time by a "highly confident" letter from a commercial bank - which Upper Deck hopes might persuade Topps to come to the bargaining table.

In short, I think that there's a shot that an agreement could be worked out with Upper Deck. That said, I also think that there is a possibility that Tornante and Madison could up their bid in response to this new courtship.

Bidding War Speculation
If Topps continues to spurn Upper Deck's interest, there could actually be a pullback in the share price nearer to the $9.75 offer/agreement already on the table. If, however, it appears that discussions with Upper Deck are fruitful, I would argue that the stock could surge on speculation of a bidding war.

In any case, I am happy for the kids that collect cards these days, because if a combination can be struck with Upper Deck, I suspect that the sheer number of cards being manufactured will decrease (as the combined companies would probably look to cut costs). Individual card prices may again begin to rise.

Playing The Stock
Wall Street expects Topps to earn 44 cents per share this fiscal year (ending February '08) and 60 cents per share next year, implying some pretty hefty growth expectations. If the company weren't already party to a definitive acquisition agreement, I'd consider buying the shares based upon the fundamental outlook.

However, its earnings outlook doesn't really matter as much right now, given that one of the two above-mentioned firms (or another white knight) is likely to win custody of the card maker.

That said, if I already held the stock, I'd probably continue to hold it because I sincerely believe that Tornante may up its bid in order to take Upper Deck out of the picture. If however, I had been sitting on the sidelines, I'd only consider buying the shares if I were simultaneously willing to sell the $10 call options and collect a 20 cent premium. That would at least, theoretically, provide some downside protection.

The Bottom Line
I sense that current shareholders could benefit from what is shaping up to be a bidding war. A deal would also be good for collectors (and the industry as a whole), because consolidation with Upper Deck would hopefully lead to a reduction in the total number of cards being printed.

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