Hasbro Dal Analysis
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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 3 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. 5 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 6 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 7 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.