June 18, 2007

Baseball Card Article in Crain's NY Business

The following appears in this week's Crain's NY Business (June 18-24, 2007)

Topps this: the battle for an icon

By: Aaron Elstein

Growing up, Ben Henry spent whatever money he had on baseball cards, accumulating 160,000 of them until he stopped collecting in 1995. One of his favorites is the 1985 card of Eddie Murray, because he thinks the Hall of Famer's Afro, sideburns and moustache resemble a "never-ending Saturn ring of hair."

"It was a lot of fun to pay a quarter, tear open a new pack of cards and see what you'd get," recalls Mr. Henry, a 28-year-old resident of Forest Hills, Queens, who writes The Baseball Card Blog.

The days of 25-cent packs are long gone and so, for the most part, is the baseball card business itself. Sales have fallen about 80% in the past 15 years, crushing the fortunes of Manhattan-based Topps Co., the industry's most famous name. Indeed, as two firms compete for control of Topps in an increasingly heated takeover fight, the question is whether either can revive the storied brand.

"The business of baseball cards has really shrunk," says Scott Kelnhofer, editor of industry publication Card Trade. "There are fewer collectors, fewer trade shows. It's like all the growth the industry saw two decades ago never happened."

Topps has struggled for years as nightly televised baseball, video games and online sources of player statistics conspired to clobber its card franchise. Last year, it earned $11 million on revenue of $327 million, 43% of which came from candy sales unrelated to cards. In 1992, when frenzied collectors drove up sales, Topps posted profit of $54 million on revenue of about $300 million.

Staying power

Still, Topps remains a potent name. It survived the fallout from the industry's speculative bubble, ultimately forcing out rivals Fleer, Donruss and Pinnacle.

The takeover battle for Topps pits its last remaining competitor, Upper Deck Co., against a private equity group led by Michael Eisner, the former chief executive of Walt Disney Co. Their showdown represents what could be the last fight in a business that, though in decline, still evokes powerful emotions.

"I learned how to read with baseball cards," says Pete Williams, author of Card Sharks: How Upper Deck Turned a Child's Hobby into a High-Stake, Billion-Dollar Business.

"Topps is apple pie and the American flag," Mr. Henry says.

Fittingly, the process of selling this icon is proving to be agonizing. The saga began in March, when Topps accepted a $385 million cash bid from the Eisner group.

Topps then decided to hunt for other buyers. Such "go-shop" periods are increasingly common among firms poised to be bought by private equity groups but seldom produce higher bids, because potential buyers are rarely willing to risk breaking up existing agreements.

Not this time. Upper Deck trumped the Eisner bid with an offer of $416 million. Topps rejected it, questioning whether privately held Upper Deck could finance the transaction, but agreed to negotiate.

Upper Deck sued, and last week a Delaware judge granted an injunction blocking a scheduled June 28 shareholder vote on the Eisner bid.

Ultimately, the Eisner group, which has said little publicly about its plans but intends to retain Topps senior executives, will have to at least match Upper Deck's bid to prevail.

"Nobody is going to be comfortable turning down a higher offer," says Joel Greenberg, a partner at law firm Kaye Scholer who has worked on deals involving baseball card companies. Topps' strongest case for rejecting the Upper Deck bid probably rests on antitrust grounds, he says.

Whoever wins Topps faces a bumpy road.

Decimated market

Wholesale revenues for all sports trading cards were about $270 million last year, compared with a peak of $1.2 billion in 1991, according to Card Trade.

The boom was partly driven by upstarts like Upper Deck, which launched in 1988 with a line of cards offering high-quality photography and holograms to discourage forgery. Topps responded with its own high-end cards, and the race was on to cater to collectors with elite merchandise.

Along the way, children, the bedrock audience for cards, were priced out. The cheapest Topps pack retails for 99 cents but contains only six cards. Other packs range from $2 to $5 or even $10.

In fact, in an effort to appeal to as many buyers as possible, Topps and Upper Deck produce 40 different lines of cards between them. That's a far cry from the days when kids waited to get first crack at the single line Topps unveiled each spring.

"The arrival of the new set of baseball cards used to mean a new season was here, and it was something kids looked forward to," Mr. Williams says. "The anticipation is gone, and so is the golden goose."

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