* Deal could value LeapFrog at up to $10/shr - fund manager
* Mattel, Hasbro likeliest to be interested
* Mattel may have upper hand as it has Fisher Price
* LeapFrog brand, debt-free balance sheet adds to attraction
By Abhishek Takle and Viraj Nair
BANGALORE, Feb 10 (Reuters) - LeapFrog Enterprises Inc's disappointing outlook last month battered its shares, making the educational toy maker a potential $650 million target for Mattel Inc or Hasbro Inc , the two largest U.S. toy makers.
Mattel CEO Robert Eckert last week told analysts the M&A landscape in the $22 billion U.S. toy industry was looking more favorable as some competitors struggle, but he warned that his company would stick to its mantra of buying "the right thing at the right time at the right price."
Fund manager Robert Auer, who sold his stake in LeapFrog in the wake of the company's weak outlook, reckons a deal could be on the cards given the bigger companies' history of acquiring rival toy lines.
"You can make the case that LeapFrog can get an offer between $7.50 and $10 a share, depending on how the deal is priced," said Auer, senior portfolio manager at SBAuer Funds, who has bought and sold the stock several times.
An offer at $10 a share would value LeapFrog at $646 million, more than double its current market capitalization.
The company -- founded in 1995 by Michael Wood when he found no products to help his son to read -- has failed to live up to its expectations, and its stock has plummeted from a life high of $47 in 2003, a year after it went public, to below $4.
"If LeapFrog can't turn things around and get the stock price up, it would represent a decent opportunity for both Hasbro and Mattel ... both can buy it pretty easily," said Wedbush Securities analyst Edward Woo.
Woo values LeapFrog at $5 a share, or $323 million, but said the company would likely hold out for an offer of above $6 a share.
LeapFrog trades at 0.62 times on a price-to-sales basis, at a discount to both Mattel and Hasbro, which trade at about 1.55 times.
The company expects its sales to grow 13-14 percent in fiscal 2010, whereas sales of educational toys fell 6 percent to $1.3 billion last year, according to market researcher NPD Group.
LeapFrog declined to comment, saying it is in its 'quiet period' ahead of reporting earnings later on Thursday. Hasbro and Mattel did not respond to requests seeking comment for this article.
FISHER PRICE PLAYMATE?
LeapFrog is one of the dominant players in the educational toys arena and its Leapster Explorer, a handheld gaming device that doubles as an e-reader, was hailed as one of the top toy picks for 2010.
"LeapFrog is a very strong brand, they don't have any debt and have a clear runway of growth ahead. These factors would probably appeal to another toy company," said Imperial Capital LLC's Lee Giordano.
Mattel, the maker of Barbie and Hot Wheels toys, is seen a likelier bidder as it already owns Fisher Price, bought in 1993, which makes toys for infants and children, including the popular Thomas and Friends line.
Mattel had more than $1.28 billion in cash and equivalents at end-2010. Hasbro, known for its Transformers and G.I. Joe toy lines, had around $728 million.
"Mattel will be the more likely bidder because they're stronger in the pre-school category ... there would be great synergies with Fisher Price," said Woo.
"It's not just the money, it's also the time and attention. Hasbro wants to focus on big brands ... and LeapFrog doesn't necessarily do that," added Woo.
"It doesn't bring superior intellectual property ... characters like Transformers and G.I. Joe."
(Reporting by Abhishek Takle and Viraj Nair in Bangalore) (Editing by Ian Geoghegan)