Hasbro Dal Analysis

Hasbro, Inc.

Hasbro, Inc. is an American multinational toy and entertainment company, which has been listed in NYSE since 1999. Hasbro fulfills the need for entertainment of children and families around the world through content development including toys, games, television program, films and digital gaming. To do this, Hasbro focus on leveraging its brands and creating 'play' experiences through immersive storytelling and product innovation.

The Deal in a Nutshell

We recommend that China Media Capital moves to buy Hasbro’s shares at a price of

$117.06, or a total of $14.55B USD. This would represent an 20% premium over the current publicly trade price of Hasbro. We would recommend the deal is financed with $9.23B in debt and $5.32B in equity, which would maintain the current debt to equity ratio. We project that the deal will have an IRR of 17%, and return on equity of 28%.

Deal Analysis

Hasbro has an identity problem. It is a toy company that has divisions that operate more like media or software companies. About three quarters of the company is focused on toys based on characters and stories that Hasbro owns or that it licenses. These characters have spawned movies, including the Transformer series and this year's My Little Pony premiere.

This side of the company makes money through continuing the sale of the original toys but also finding ways to leverage their characters through other media and the expansion of these stories. This side of the company competes against Mattel, but also media companies like Disney, who owns Marvel and LucasFilms. The other quarter of the company focuses on

2 games, both physical and digital. They create value for the consumer through improving existing games and innovating on new games. Hasbro now has an in-house digital developer

(the recently acquired BackFlip), which has been steadily releasing mobile apps and has a close working relationship with Electronic Arts. This portion of the company has evolved to be part of the gaming and software industry and competes with companies like Zynga and

Activision Blizzard. Immediate value could be unlocked by splitting these divisions apart.

Software gaming companies trade at a P/E ratio over twice what Hasbro is currently traded at.

Transitioning the rest of the company to become more of a media company will take a more long term approach. It may involve spinning off some of the non-story based assets (such as

Play-Doh and Nerf) but ultimately could garner another valuation at a higher P/E ratio. A possible win-win-win would be created if the rest of the toy and media business was sold to a joint venture between two companies like Disney and Alpha. Disney and Hasbro already have a strong working relationship, since Disney has given the licenses of Star Wars and

Marvel to Hasbro to make toys for. Disney could add the IP from Transformers and My Little

Pony to its already massive stable of stories. Alpha, a Chinese toy manufacturer, could use

Hasbro’s distribution and toy manufacturing licenses, and China Media Capital should be able to bring this firm to the table. Alpha could be able to further reduce the costs of goods sold and improve product quality by having more direct control over the actual manufacturing of the toys. Other potential buyers would be Flagship Entertainment (a China

Media Capital and Warner Brother joint venture) and Mattel, Hasbro’s primary rival.

Ultimately, the toy and media assets can be spun off to the highest bidder, and China Media

Capital would have the luxury of being patient after selling off the software and gaming division.

In addition to splitting these divisions apart, there are other means for increasing the value of Hasbro. First, Hasbro has had a difficult time fully realizing the potential of developing markets, specifically China. While Hasbro has made steady progress in increasing sales in

China, it still gets over 51% of its sales in the United States. In Hasbro’s annual reports, they do not breakdown sales outside of the US, but we believe a rough estimate would be 25% in

Europe and the other 24% between South America and Asia Pacific. We believe an additional 10% in overall sales is possible through better localization and aggressive marketing in these target markets, which would bring Asia Pacific and South America up to

30% of the overall revenue.

Second, Hasbro has experienced many profitable years since the last recession. It is extremely likely that the workforce is bloated and management compensation is high. A key example would be Hasbro’s CEO, Brian Goldner, was paid over $10M in 2016. By taking

Hasbro private, the normal levers of cost cutting can be implemented. We suspect that these will have a large impact on the company’s bottom line.

China Media Capital's Value Add

China Media Capital (hereinafter CMC) is ideally positioned to capitalize on all of these levers to add value. First, one of its largest investors is Tencent, who would be an ideal target to sell off the software and gaming division to. Second, CMC has local capabilities and political access in China. CMC is the first private equity fund focusing on media, content

4 development and entertainment investments that is approved by the National Development and Reform Commission, with a fund size of 30 billion RMB. To develop entertainment business in a country with media censorship such as China, business recourse and political access are crucial. CMC, CMC Holdings and the other industry partners (i.e. Tencent, Alibaba and Shanghai Media Group) guarantee a high level of strategic resources of China market and the amount of capital needed. Lastly, as a PE firm, CMC has experience buying and increasing the profitability of media companies, both domestic and international. By splitting the company, growing sales in China and increasing profitability, CMC can be confident in healthy returns.

Table of Contents

HASBRO, INC. 2

INTRODUCTION 7

DEAL DESCRIPTION 8

HASBRO 8

COMPANY ANALYSIS 8

1. IS THE BUSINESS ATTRACTIVE? 8 2. DOES THE COMPANY HAVE A COMPETITIVE ADVANTAGE? 12

VALUATION & PRICE 14

3. WHAT IS THE INTRINSIC VALUE AND WHAT IS YOUR MARGIN OF SAFETY? 14 4. WHO IS SELLING AND WHY IS IT CHEAP? 16

DEAL & VALUE ADD 17

5. HOW MUCH CAN FINANCIAL ENGINEERING IMPROVE RETURNS AT PURCHASE? 17 6. HOW MUCH OPERATIONAL VALUE CAN BE ADDED? 17 7. WHAT IS YOUR EDGE OR ACQUISITION ADVANTAGE? 21

RISK & RETURNS 22

8. WHAT IS THE WORST CASE SCENARIO? 22 9. DOES THIS COMPANY PASS THE PUNCH CARD TEST? 24

CONCLUSION 24

REFERENCES 25

APPENDIX 25

TENCENT COMPANY ANALYSIS 30

INTRODUCTION

Assuming CMC will buy Hasbro, this paper is to analyze the feasibility and possibility of the deal. Hasbro owns and controls beloved brands including LITTLEST PET SHOP, MAGIC: THE

GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS, as well as the licensed brands of strategic partners. Through successfully developing and expanding these critical brands, Hasbro creates a wide range of toys and games, television programming and motion pictures, and a broad range of consumer products. As of

December 31, 2016, Hasbro’s total shareholder return outpaced both the S&P 500 and

Russell 1000 Consumer Discretionary Index over each of the 1-year, 3-year, 5-year and 10- year periods.

Our analysis indicates that the company has a current market capitalization of $12.1B USD.

It is currently being traded at $97.55 after falling from a high of $116.20 in mid-July. Ideally, the deal would take place before the next Annual Meeting in May 2018, giving time for a full due diligence. We recommend paying a 20% premium over the current market capitalization to acquire Hasbro and its IP, at an estimated price of $14.5B. We recommend using $9.2B in debt for the purchase, and to plan to sell the gaming division off within 2 years and the rest within 7 years. New debt would be taken out with the goal of maintain the current debt to equity ratio.

CMC is one of China’s largest and most prestige private equity firm focusing on media and entertainment investments. CMC was founded in 2009 with 30 billion RMB assets under management. Its limited partners include Shanghai Media Group, China Development Bank

Capital, CBC capital, etc. Additionally, in 2015, with capital commitments from Tencent

Holdings Limited, Alibaba Group Holdings and Suzhou-based private equity firm Oriza

Holdings, China Media Capital (CMC) has launched CMC Holdings, an investment platform serving as an investment and operation unit under CMC. With strong strategic partners and rich capital resource, CMC successfully invested in over hundreds of projects, such as

Broadway Global Ventures (BGV), Oriental DreamWorks, etc.

DEAL DESCRIPTION

CMC will buy Hasbro and bring it private. It will spin off the gaming division and work to improve the media division. Ideally, it will ink a deal with Tencent before the purchase to buy the gaming division before they move forward with the purchase. This results in a win- win, Tencent gets the parts of the company it can best leverage, and CMC maintains the parts that it can best leverage. After spinning off the gaming division, CMC can set about improving sales in developing countries and increasing the company’s efficiency.

HASBRO

COMPANY ANALYSIS

1. Is the business attractive?

With the utilization of technology and digital media in entertainment, the types and forms of entertainment available to consumers are increasing. Children at younger and younger age spend increasing time on smart devices to use social media or enjoy digital content. As children expand their interests to a wider range of innovative technology-driven

8 entertainment products, the toy and entertainment industry are facing a rapid shifting of consumer interest and ever expanding pipeline of products nowadays. Traditional toy companies are compelled to compete with tech companies who offer electronic devices, digital content and/or social media. To survive in the new environment and meet the needs of customers, traditional toy companies such as Hasbro and LEGO have evolved into toy and entertainment companies, offering a more diversified array of products from toy to content development including digital gaming, films, television program and so on. Hasbro increasingly invests in R&D and acquires new tech start-ups to design and market products integrated with technology and digital play, seeking to capitalize on new play and entertainment mode such as digital game or other content.

Competition for children’s and families’ interests has become ever fiercer. Risk of failing to attract consumers and the probability that a product just be popular for a short period time is higher than ever. Even the industry leader Mattel decreased in revenue and earnings in the past 3 years. Thus, to anticipate, attract and maintain interests of children, strategy of brands development across a wide range of innovative toys and games and other contents becomes significantly important. Almost every toy and entertainment company increasingly invests in developing and expanding their critical brands. These classic brands become the most valuable assets.

As product life cycle becomes shorter, the industry is also facing challenges to develop and launch products and brands in a timely manner. If a company fails to operate in a more cost effective way, sales volume and profitability will be reduced.

Customers, markets and products. The main target customers for Hasbro are infants, children and their families; however, the company also markets products designed for fans of classical and popular IPs such as MARVEL. People over 14 years of age consume approximately 20% of Hasbro’s product. Generally, Hasbro markets its brands under 4 primary product categories: Boy, Girls, Preschool toys and Games. Boys. Boys franchise brands and products are composed of NERF action sports products and TRANSFORMERS.

Licensed product lines based on popular IP, such as MARVEL and STAR WARS, account for a significant portion of boys’ category. Other than franchise brands and licensed products, the boys’ category also contains SUPER SOAKER water blasters and figures. Games. Through acquisition and innovation, Hasbro builds up a series of well recognized games brands, including MAGIC: THE GATHERING, CONNECT 4, ELEFUN & FRIENDS, GAME OF LIFE, JENGA,

OPERATION, SCRABBLE, YAHTZEE, TRIVIAL PURSUIT, TWISTER, PIE FACE, and SPEAK OUT.

Hasbro has also recently acquired BackFlip, a digital developer, to create apps to allow for new ways of reaching their customers. Girls. Girls franchise brands include My Little Pony,

Littlest Pet Shop which are supported by animated television programming and film while girls’ challenger brands include Baby Aive, Furby and Furreal friends. Girls category also contains certain product lines based on popular licensed IPs such as DISNEY FROZEN and

DISNEY PRINCESS. Preschool. Target customers of preschooler category are infants and preschoolers. Preschool product lines complement girls and boys product lines under the same franchise brand and licensed brands.

Porter’s five forces. We use the five forces framework to analyze the attractiveness of the industry.

Rivalry & Substitutes

The threat from rivals is high. Due to the development of innovative technology and digital media, entertainment available to children and families is more diversified now. Traditional toy companies have not only experienced fierce competition from each other but also the challenges from the new entertainments such as digital gaming, smart devices, social media, etc. Thus, market sizes of traditional toy in certain segments are declining in recent years.

Hasbro and Mattel control most of the market share and new entrants have a hard time competing.

Barriers

Barriers to entry the industry are low. A large number of large and small manufacturers, marketers, and retailers of toys and games and other entertainment products who develop products under their private labels exist in the market worldwide. In addition to existing companies, the increasing utilization of digital media and smart device has further increased the possibility of new participants who have innovative ideas or entertainment property successfully entering the markets. As a result, big players such as Hasbro are emphasizing developing franchise brands and story-led initiatives to differentiate products. They also are launching products that are more innovative, either integrating with new technology or using digital functions.

Buyers

With so many options of products and new information, individual consumer interests change rapidly from year to year. It’s difficult to anticipate correctly the types of entertainment content and products that will be popular and launch products within the limited time. Therefore, big players gradually focus on developing their brands across multiple products and categories to extend the popularity of their products and deliver a higher profit.

Suppliers

Bargaining power of toy manufacturing suppliers or content providers is relative low in this industry as big players of the industry own the valuable entertainment properties, brands and distribution channels. Over the past years, the industry outsourced the manufacturing process to factories in Asia and used third party content providers to develop games, animation, programs and films. However, third parties who own critical entertainment properties have relatively strong bargaining power as partnering with them can guarantee revenue. Thus, the big players in the industry also maintain solid relationships with these key partners such as Disney and Warner Brother to have licenses for successful entertainment properties.

Overall, the industry is not overly attractive. Almost all the forces are working against toy manufacturing except for Suppliers. While toy manufacturing is not the most attractive industry, the software and media industries are much more attractive. Media can leverage trademark laws to prevent companies duplicating products. Software, and especially gaming companies, benefit from both upfront costs of creating content as well as network effect from large player bases for multiplayer games.

2. Does the company have a competitive advantage?

Through analysis of return on invested capital and market shares, we find Hasbro has strong competitive advantages over its competitors. As of December 31, 2016, Hasbro’s total shareholder return outperformed both the S&P 500 and Russell 1000 Consumer

Discretionary Index in each of the 10-year periods. The declare of a 12% increase in quarterly dividend in Feb. 2017 is the 13th increase in quarterly dividend over the past 14

12 years. While Mattel, the world’s largest toy and entertainment company, recorded a continual decrease in revenue in 3 years from 6,023 million to 5,456 million, Hasbro had

18% increase in revenue from 4,280 million to 5,070 million in the past 3 year. Hasbro’s sustainable growth clearly indicates that the company has a strong competitive advantage.

We will analyze its strategy and performance in detail.

The ability of providing consumers with comprehensive and immersive entertainment experience in a different format is a competitive advantage of Hasbro, which results in its increasing product sales, royalty revenues, and overall brand awareness. Toy and entertainment is a marketing driven industry. In Hasbro’s strategic blueprint, brands sit at the center, which are the most valuable resources of the company. Hasbro owns one of the richest brand portfolios in the industry, as it has strong competencies to develop brands through storytelling, digital content and consumer products. The TRANSFORMERS brand is a concrete example of how Hasbro successfully develops and promotes a brand to global consumers in a wide array of market across all mediums. TRANSFORMERS has been supported by four major successful films along with animated television program developed by Hasbro Studios over the past decade. Besides, to further extend brands, Hasbro not just 13 developed content of brands by its owned studios, but also out licenses its properties to third parties who engaged in forms of gaming, books, television programing and other indirectly competed products based on its owned and controlled brands. For example, the

Company has relationships with Electronic Arts Inc., Activision and others to develop digital games. In 2016 revenues from 7 franchise brands accounted for 46% of its aggregate net revenues.

Hasbro’s rich global retailer relationship which enables consumers to buy Hasbro’s brand almost at anytime and anywhere is the company’s other competitive advantage. It not only has comprehensive sales channels in U.S. and Canada, but also rapidly increasing reach in emerging markets in most countries in Europe, Latin and South America, and the Asia

Pacific region. The company has offices in over 35 countries but sells through distributors in more than 120 countries. Hasbro also has strong ability to provide innovative e-commerce experience to consumers and drive profitable sales conversion, with investment in people, marketing, data and technology. For example, with a successful integration TRANSFORMERS into Alibaba 11/11 Singles’ Day celebration in China, Hasbro drove a 47% increase in the

TRANSFORMERS brand and created a lifting of all Hasbro brands by 50% in Tmall sales in

2016.

VALUATION & PRICE

3. What is the intrinsic value and what is your margin of safety?

There are many different ways to value a company. The most conservative valuations would be liquidation or replacement prices. Liquidation price, or the price if all assets were sold and all liabilities were covered, ends up being $289M. This makes sense, since Hasbro

14 operates at a Debt to Equity level of 1.72, and therefore would take a sizeable amount of the assets to cover the debt. The replacement price is the price it would cost to build this company from scratch. This would include the cost of intangibles and IP, which make up a sizeable portion of Hasbro’s portfolio. The replacement price for Hasbro, conservatively, would be $1.88B, which includes the intangibles and goodwill from their acquisitions. It is difficult to price in the IP that they have developed in house without extensive analysis, but we would give a best case scenario estimate around $2.5B.

For a more accurate assessment of the value of Hasbro, we have performed a DCF analysis.

This looks at the discounted cash flows for the following 10 years to approximate a value for the company. Critical to this estimate is finding a WACC, or weighted average cost of capital, to discount the cashflows by. We used the CAPM model to do this, and came up with a

WACC of 6.45%. This uses a weighted average of the cost of equity being 10.35% and the cost of debt being 5.5%. With this, we estimate the value of Hasbro at $15.013B

The current market capitalization of Hasbro is $12.125B, which is substantially below our estimate, most likely because it has priced in more risks that are not readily apparent from the accounting statements. Such risks include macro concerns of another recession, to the loss of profitable licensing deals, or a slow down in growth. The market has an implied

WACC of 9.5% compared to our estimated 6.45% using the CAPM model.

Our recommended price of $14.55B offers a 20% premium over the currently traded price.

However, it is still offers a $462M margin of safety from our estimated DCF value. This margin is further increased by the value unlocked by splitting off the gaming and software

15 divisions of Hasbro. We have estimated that this will result in an additional $1.159B in profit, making the entire margin of profit $1.621B. Our assumptions for unlocking that additional value are that we would be able to spin off the gaming division at the industry average P/E multiple of 40.4 within two years. Further value can be created by expanding the sales in developing markets and cutting costs. The ideal timeframe would be within two years, and hopefully we would be able to make an arrangement with Tencent before moving forward with the acquisition of Hasbro.

We would finance the deal with two loans totaling to $9.226B. These would be split between a 3-year and 7-year so that they would expire roughly with the sale of the separate divisions. The rates would be 7% and 9% respectively, which we feel are conservative estimates.

4. Who is selling and why is it cheap?

CMC would be buying this from the public market. Currently, most publicly traded assets are overpriced and it is hard to find one that is underpriced. However, we believe that the gaming division of Hasbro is not properly being valued by the market. Hasbro, the current market leader in the US for toys, is currently being traded at 21.1 price to earning ratio. This compared to an industry average of Leisure Goods of 30.6, seems low to us. Furthermore, almost a quarter of the company operates as a software gaming company, which trades at a

40.4 multiple. Since Hasbro has been slowly evolving its gaming division to become more and more digital, we believe that the markets have not updated their view on this division.

Therefore, they are underpricing the overall value of the company.

DEAL & VALUE ADD

By spinning off the gaming division we expect to unlock $1.159B in value. The value add of

CMC is being the middle man for Tencent, and being able to spin off the other assets in the best manner possible.

5. How much can financial engineering improve returns at purchase?

There will be limited financial engineering. Hasbro already has a relatively high Debt to

Equity ratio at 1.72. We will take out two different loans, each timed to the different time horizons of the deal. This should result in almost no change to the current debt structure of the company.

We believe aiming to finance the purchase with $9.226B of debt, which would maintain the current debt to value structure of the company. In our model, we use a 3-year loan with a very 7% annual interest rate and a 7-year loan with a 9% annual interest rate. We believe these rates are conservative. This gives the deal a 28% return on equity, with $5.323B needed for the initial purchase. If higher rate of returns were required, more debt could be taken on, which would increase the risk involved.

6. How much operational value can be added?

Taking into account the Hasbro acquisition, we know that the most important thing for

Hasbro is not money, but the improvement of business and new growth opportunities. By splitting the company into two business of gaming software business and media &toy business, Hasbro could maximize its company value. We believe that the attractiveness of

17 this deal lies in the potential synergies that could be created by among Hasbro, Tencent and the potential buyer of the media & toy business.

This deal will help Hasbro dramatically increase their business in China and sustain the long term growth. As analyzed above, nowadays, children are increasingly sophisticated and have been moving away from traditional toys and games at a younger age. Even though the current business of Hasbro is still growing, they are facing the declining consumer need in traditional toys and fierce competition from other toy companies, especially toy companies in China with cost advantage. The product life of toys becomes shorter. And the growth in US and Canada market have gradually slowed down. Hasbro needs a new growth engine for their business. Now revenue from the China market only accounts for 1% of Hasbro’s global revenue. But as we see here, the growth in Asia Pacific is the fastest because of the strong driving force from the China market. With the second baby policy, China will encounter baby boom in the next decade. The birth rate of China in

2016 is 12.95 ‰, which is the highest growth rate since 2011. The Chinese market definitely will become the most attractive market in the world for Hasbro. After the acquisition, AMC will divide the Hasbro business into 2 parts and sell separately to different buyers from

China. Hasbro could realize it full growth potential in China, with the support from china partners.

With local resources and capability, CMC could add value on the political access to China market for Hasbro. Political access is very important in a market like China, where relationships are still a fundamental asset in order to do business and be successful, especially in the media field which is highly restricted by Chinese government. For a company like Hasbro that wanted to enter into the Chinese market, these connections were and are essential. Therefore, we believe political access is a critical source that allows CMC to succeed in this deal. CMC is the first private equity fund focusing on media, content development and entertainment investments that was approved by China National

Development and Reform Commission and funded by several large state-owned media companies. CMC could help Hasbro with the political access to China market.

Tencent could accelerate Hasbro’s gaming business with excellent operation capability and local resources in China. Currently the games owned by Tencent are majorly Chinese local games. Tencent would like to expand its product portfolio by acquiring some good international game companies. Tencent already has acquired more than 20 overseas gaming companies since 2011. In 2016 Tencent acquired foreigner gaming company of Supercell with $9Bn and 5% share of Paradox. As a part of its international strategy, Tencent will continue to acquire foreign gaming companies in the next few years.

Hasbro’s business is diversified and they do not have advantage when competing with other gaming companies in the market. As China’s biggest media and entertainment company,

Tencent’s expertise will help Hasbro’s gaming business growth. And at the same time,

Tencent could quickly expand its global business by acquisition.

Hasbro’s toy & media business could enter China market by utilizing the local network and resources of potential buyer in China, and at the same time, the buyer could leverage the worldwide distribution network of Hasbro to expand their business internationally.

Hasbro’s own sales forces account for the majority of sales of their products. Hasbro’s products are sold globally to a broad spectrum of customers, including wholesalers, distributors, chain stores, discount stores, drug stores, mail order houses, catalog stores, department stores and other traditional retailers, large and small, as well as internet-based

“e-tailers.” For the potential buyers, we are now considering some candidates in China.

For example, Alpha, the biggest toy and media company in China. It is very difficult and takes a long time for a Chinese toy companies to build distribution internationally. And the

Chinese company has the local distribution network which will be helpful for the Hasbro business to enter the China market. We think it would be a good synergy between Hasbro and the Chinese potential buyers.

We are projecting a 10% increase in overall revenue by these increases in China and other target developing markets over 7 years. This would account for an additional $139M in profit discounted back to the present, and would be on top of the $1B+ seen from spinning off the gaming division.

With the local resource and management team, the Chinese buyer could help Hasbro reduce the toy product cost. China is the largest manufacturing center of toys in the world and the majority of toy products are manufactured in China. Although most of Hasbro’s products were manufactured in third party facilities in the Far East, primarily China, Hasbro still has two owned facilities located in East Longmeadow, Massachusetts and Waterford,

Ireland. We believe that if Hasbro’s toy and media business is acquired by Chinese buyer, they could reduce the production cost in China and gradually close the two facilities in East

Longmeadow, Massachusetts and Waterford, Ireland.

We project that through cost cutting methods, CMC could increase the earning to revenue ratio .17% per year for 7 years. This would result in another $164M in profit alone and would compound with the growth in the China market to the tune of about $11.1M.

Together, improving sales in Asia and cutting costs would yield an additional $315.7M in value discounted to the present.

7. What is your edge or acquisition advantage?

China Media Capital (hereinafter CMC) is ideally positioned to capitalize on all of these levers to add value.

First, as a PE firm, CMC has experience buying and increasing the profitability of media companies, both domestic and international. CMC is a private equity company focusing on media and entertainment. CMC has accumulated much successful investment experience in media and entertainment field both in China and oversea. By splitting the company, growing sales in China and increasing profitability, CMC can be confident in healthy returns.

For example, CMC acquired Mandarin Channel, International Channel, Music Channel, and

Star Chinese Film Library business from Star TV, which was formerly owned by Murdoch

News Group. This is the first investment of CMC. One year after the investment, the business turned from loss to profit.

Second, one of CMC’s largest investors is Tencent, which is an ideal buyer of software and gaming division of Hasbro. Tencent is the largest gaming and entertainment company in

China. And they are always seeking for suitable asset to acquire. CMC could align with

Tencent about this deal in advance

Third, CMC could help Hasbro’s toy and media business find a Chinese buyer and accelerate their growth in China. China market now only accounts for 1% of Hasbro revenue, but the growth rate in China is 18% which is the highest among all the countries.

CMC has strong network in entertainment and media industry and could help Hasbro find partners to sustain the long term business growth in China.

Lastly, CMC has local capabilities, resources and political access in China. CMC is the first private equity fund focusing on media, content development and entertainment investments that is approved by National Development and Reform Commission, with a fund size of 30 billion RMB. To develop entertainment business in a country with media censorship such as China, business recourse and political access are crucial. CMC, CMC

Holdings and the other industry partners (i.e. Tencent, Alibaba and Shanghai Media Group) guarantee a high level of strategic resources of China market and the amount of capital needed.

RISK & RETURNS

8. What is the worst case scenario?

We identify the potential threat for the deal as follows.

Fail to spin off the business appropriately. To establish a cohesive brand direction and help local marketing programs, Hasbro’s toy and game products are primarily developed by cross-functional teams, including global development and marketing groups. It will be a big challenge to successfully spin off the entertainment and licensing business while avoiding negative effects on the toy business. CMC needs a powerful and well-experienced management team to fulfill the spin off goal.

Economic turndown. The overall global and China’s economy is not stable and secure now.

If growth rate of China economy slows down in 1-2 years, our potential buyers willingness to acquire Hasbro’s spin off business will not be guaranteed. If CMC fails to split Hasbro’s business in a short period time, Tencent and Alpha will possibly give up the deal because of economic turndown or any other strategic change in accordance with rapid market changes.

Significant change in currency exchange rates. Changes in currency exchange rates during the business splitting process can significantly impact the return of this deal. As assets of

Hasbro are mainly in the overseas market, the appreciation of RMB before CMC sells out the splitting business to a potential Chinese buyer will reduce the return on this deal.

U.S government or public against the buyout. As a private equity has strong relation with

China’s government, CMC buyout Hasbro, which is a 500 fortune, may attract attention from U.S government or public. The opinion of U.S government or public may be against the buyout deal, which could result in a failure.

Losing lucrative licensing deals. A substantial part of the revenue from non-gaming related products is from products with licensed brands. Such brands include Marvel and Star Wars.

Disney may pull these licenses and give them to Mattel. It would be critical that CMC maintains a good working relationship with Disney, especially since Disney would be a potential buyer of the Transformer and My Little Pony IPs.

9. Does this company pass the punch card test?

If you could only buy 20 companies in your life, would Hasbro be one of them? We believe that the company does have a competitive advantage. As analyzed above, the overall toy industry is declining. It is a good timing to acquire Hasbro. Considering the company splitting plan and potential value add discussed above, we think this would be a good deal.

After we sell gaming & software business to Tencent, if we just sell the rest off at the same price we bought it at, we will still make a profit because of how valuable the gaming portion is as a software company. Thus, Hasbro dose pass the punch card test.

CONCLUSION

We believe that this deal would be a win for everyone involved. CMC can immediately unlock value by separating out the software and gaming divisions of Hasbro. Tencent, the target acquirer of these assets, would gain traction in the United States. The stories and IP can be sold to a media company such as Disney or Flagship Entertainment so that it can be leveraged with more expertise than at Hasbro. The toy distribution and licenses could be sold to another toy company that can hopefully leverage them more profitably than Hasbro has.

APPENDIX 1. Hasbro Value Model

2. Tencent Analysis

REFERENCES

• Hasbro Annual Reports http://investor.hasbro.com/annuals.cfm

• Morningstar http://www.morningstart.com

• Nasdaq http://www.nasdaq.com

• Tencnet Annual Report https://www.tencent.com/en-us/investor.html

Hasbro Value Model

Historical Data Historical

Analysis of Assets, Debt, and WACC

Projection Projection ofFuture FlowsCash

Projection Flows Cash Future of Projection

Value of the Deal

Tencent Company Analysis

Company overview:

Founded in November, 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has maintained steady growth under its user- oriented operating strategies. On June 16, 2004, Tencent Holdings Limited (SEHK 700) went public on the main board of the Hong Kong Stock Exchange.

Tencent's mission is to enhance the quality of human life through Internet services. Presently,

Tencent provides social platforms and digital content services under the “Connection”

Strategy. Tencent’s leading Internet platforms in China – QQ (QQ Instant Messenger),

Weixin/WeChat, QQ.com, QQ Games, Qzone, and Tenpay – have brought together China's largest Internet community, to meet the various needs of Internet users including communication, information, entertainment, financial services and others. The following picture show all the business those are owned and operated by Tencent. Besides, there are many businesses invested by Tencent all over the world. Tencent intends to continuing expand the business through acquiring good assets globally, aligning with the overall business goal of enhancing the quality of human life through Internet services.

Gaming Business

Tencent online games business continues solid growth in the past few years. In China, several of Tencent self-created games such as Honour of Kings, Legend of YuLong Mobile and

Naruto Mobile achieved significant success. This reinforced Tencent position as the preferred China publisher for local and overseas game developers. Internationally, Tencent expanded their presence via investments in companies such as Supercell and Paradox. And

31 they also published a few of their internally developed games in Southeast Asia. Going abroad is definitely a direction for Tencent gaming business. And we believe Tencent will continue acquiring good oversea gaming companies.

Financial position

From the following chart, we could see that Tencent is in a very good financial position and have sufficient money for investment. Tencent has maintained the growth momentum for the past 5 years. The 2016 profit of Tencent was RMB41,095 million, an increase of 43% compared with the results for the previous year.