U.S. toy manufacturer Mattel has bought HIT Entertainment, the debt-laden UK children’s toy licensing company behind Thomas the Tank Engine, for $680 million in cash. That’s around $20 million less than owner Apax Partners had wanted for it, I understand, and around $200 million short of the $890 million that Apax paid for the company back in 2005. The deal gives Mattel a foothold in the television business as the Thomas & Friends TV show airs in more than 20 languages worldwide. Rival toymaker Hasbro already has its own production and distribution arm, Hasbro Studios, and owns joint venture kids network The Hub with Discovery Communications. Given the tight regulations governing toy manufacturers making TV shows in Europe, it remains to be seen how Mattel will fare if it pitches new programs featuring its toys to public broadcasters.

The deal sees Thomas the Tank Engine joining other Mattel brands including Barbie and Hot Wheels. I understand that Mattel originally just wanted to strip out Thomas from the rest of HIT’s properties — Thomas accounts for 80% of HIT’s revenues – but in the end took the entire range, which includes Barney the Dinosaur, Bob the Builder, Angelina Ballerina and Pingu. Saban Brands, Disney and Mattel rival Tomy all vied to buy HIT, but Mattel won out eventually. The $680 million deal is being financed through a mixture of cash and debt and is expected to close in the first quarter of 2012. The purchase price equates to a multiple of nearly 10 times earnings. This morning’s announcement does not include HIT Entertainment’s 30% stake in U.S. children’s cable/satellite channel Sprout. I’m told that NBC Universal is making noises about buying out co-owners Sesame Workshop and PBS, which is why Apax Partners wants to hang on to it.

Many other UK children’s TV licensing companies though are currently sitting on the naughty step. Coolabi, which distributes classic Brit TV cartoons including Ivor The Engine and Bagpuss, has lost money every year for the past decade. Chorion, which last year wanted to buy HIT Entertainment itself, is being broken up after it breached its lending covenants in March and was unable to meet interest payments on its $112 million bank debt. Observers have blamed venture capitalists such as Apax for the mess these children’s TV companies are in. Private-equity investors are so fixated on short-term cash generation, says one children’s TV producer, they do not invest in new programming to keep the children’s brands fresh. “That was the issue with Apax when they bought HIT Entertainment in 2005; they wanted to double their money in three years, but it’s taken them six years to get out of the business,” the producer said. “During that time they didn’t want to develop new shows. Private-equity firms do not have the time horizon the children’s TV business needs.”

Mattel, which makes many Thomas toys under license from HIT, has already been developing a Thomas the Tank Engine live-action theatrical film, directed by Shane Acker (9). The Mattel entertainment properties design team has been working on the movie with HIT and Peter Jackson’s New Zealand-based Weta Workshop. Cinetic Media and the UTA Independent Film Group are handling financing and distribution.