Highlights Opportunity for a Properly
Refreshed Board to Pursue a Full or Partial Sale of eOne, Which
Represents a $4.5+ Billion Capital Allocation Misstep That has
Become a Non-Synergistic Distraction
Hopes a Properly Refreshed Board Reflects on
Mattel’s Flawed Acquisition of The Learning Company and Views it as
a Cautionary Tale About Doubling Down on a Failed
Transaction
Notes That Divesting
of eOne can Improve Hasbro’s Long-Term Positioning by Enabling the
Company to Deleverage and Heavily Invest in Core Segments on Growth
Trajectories
Urges a Properly Refreshed Board to
Reevaluate a Tax-Free Spin of Wizards of the Coast Given Hasbro’s
Shares Trade at a Roughly 75% Discount to Intrinsic Value
Views Hasbro’s Decision to Ignore Ancora’s
Private Outreach Last Month as a Clear Sign of the Existing Board’s
Anti-Shareholder Mentality
Ancora Holdings Group, LLC today announced that it has sent the
below letter to Hasbro, Inc.’s (NYSE: HAS) Board of Directors.
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20220503005460/en/
***
May 2, 2022
Hasbro, Inc. Attention: The Board of Directors 1011 Newport
Avenue Pawtucket, Rhode Island, 02861
Members of the Board of Directors,
Ancora Holdings Group, LLC (together with its affiliates,
“Ancora” or “we”) is a meaningful shareholder of Hasbro, Inc.
(“Hasbro” or the “Company”), with an approximately 1% ownership
position. We have spent a significant amount of time diligencing
Hasbro’s assets, business plans, governance and historical
performance from both the financial and operational perspectives.
We have also closely followed the recent exchanges between Alta Fox
Capital Management LLC (“Alta Fox”) and the Company’s Board of
Directors (the “Board”). After considering the stagnation that has
set in at Hasbro over the past several years, as evidenced by
persistent share price underperformance, we are urging the Board to
begin taking decisive action to help the Company keep up with
Mattel, Inc. (“Mattel”) and other players in the fast-moving gaming
and entertainment worlds. This is a message we sought to convey
directly and privately, but your investor relations team has yet to
respond to our outreach in April. In our
view, the recent appointment of Chris Cocks as Hasbro’s new Chief
Executive Officer should encourage fresh thinking and
open-mindedness about the Company’s long-term strategy – not
defensiveness, dismissiveness and entrenchment on the part of the
current Board.
Ancora believes Hasbro’s long-term results on an absolute and
relative basis demonstrate that the Company’s conglomerate
configuration has created value-destructive complexity. The
consequences of this complexity include extremely poor capital
allocation decisions, including failed acquisitions and
underinvestment in crown jewel segments such as Wizards of the
Coast (“WOTC”), and a perpetually large trading price discount
relative to intrinsic value. Our own sum-of-the-parts analysis
indicates that Hasbro’s shares are currently trading at a 75%
discount to intrinsic value:
2024E
EBITDA
Multiple
Enterprise Value
WOTC
$965
16.0x
18.0x
20.0x
$15,440
$17,370
$19,300
Consumer
675
8.0x
8.0x
8.0x
5,400
5,400
5,400
Entertainment
230
8.0x
8.0x
8.0x
1,840
1,840
1,840
Total
$1,870
12.1x
13.2x
14.2x
$22,680
$24,610
$26,540
Enterprise value
$22,680
$24,610
$26,540
Net debt
2,998
2,998
2,998
Equity value
$19,682
$21,612
$23,542
Pro-forma diluted shares
141.5
141.5
141.5
Implied share price
$139.10
$152.73
$166.37
% to current
58.1%
73.6%
89.1%
Fortunately, we see three near-term action items for Hasbro that
can yield long-term benefits for shareholders:
- Initiate an Authentic Refresh of the
Board – Well-governed companies frequently collaborate
with engaged shareholders on their director refreshment efforts.
While your expansion from 11 to 13 members added gaming expertise,
that defensive maneuver did not cycle out long-serving directors or
solve the apparent skill gap that has allowed the Company to fall
behind Mattel and dramatically underperform over the long-term. We
urge you to immediately commence a real refresh that replaces
long-tenured incumbents with members of the Alta Fox slate. In
particular, we like that the Alta Fox nominees have strong
experience in capital allocation, corporate governance, finance,
transactions and transformations. The Board should welcome, rather
than fight, the fact that a top shareholder has identified
individuals with the ability to support efforts to improve the
Company’s questionable capital allocation, disclosures and overall
strategic planning during a period of rapid change in the gaming
and entertainment sectors. When considering this recommendation, we
hope you try to empathize with shareholders and view the situation
from our perspective. It is not in shareholders’ best interests to
continue giving the same directors who have overseen significant
underperformance, poor capital allocation and costly acquisitions
carte blanche to control the Board and, in turn, the Company. The
captain responsible for steering the Titanic into an iceberg did
not have the option to pick the crew for another ship. Here,
however, stale directors have access to life rafts and can do what
is best for long-suffering shareholders by handing their seats to
individuals with the fresh perspectives and skillsets required to
enhance value.
- Pursue a Full or Partial Sale of eOne
to Improve Long-Term Focus– A refreshed Board should
begin assessing a full or partial sale of Hasbro’s Entertainment
One (“eOne”) subsidiary, which was acquired in late 2019 for more
than $4.5 billion. We contend Hasbro’s venture into content
production has been an abject failure with extremely limited
long-term potential and substantial execution risk. It is clear to
us – and apparently many of our fellow shareholders – that eOne is
a non-synergistic business that is capital-intensive, low margin
and very volatile. There are also non-GAAP add-backs every year
that force us to question the reporting and earnings quality of the
segment, and these frequent adjustments pre-date Hasbro’s
acquisition, as you can see in the exhibit immediately below.
Moreover, it is also instructive to highlight that over the
cumulative five-year period preceding the acquisition, eOne
generated a paltry $167 million (USD) in operating cash flow and
negative $400 million (USD) once factoring in cash flow from
investing activities. Rather than use the excuse of unfortunate
timing due to the 2020 pandemic, the Board should own the reality
that the entertainment production industry is difficult and
littered with failures. As you can see below, eOne’s actual
historical operating results reflect these very risks and spotlight
the incredible lapse of judgment on the Board’s part that resulted
in approving this transaction. It was a $4.5+ billion transaction
for a business that generated $167 million of cash flow over five
years prior to being acquired, representing an outrageously
expensive premium for an entity that on an unadjusted basis is
marginally attractive, even at a fraction of the cost paid.
eOne Results Prior to
Acquisition
eOne (Hasbro)
Fiscal Year Ending March
31
FYE December 31
in mil. GBP
2015
2016
2017
2018
2019
2019 (PF)
2020
Revenue
785.8
802.7
1,082.4
1,029.0
941.2
1,215.8
956.5
Operating Profit
60.2
75.0
67.6
100.7
70.7
20.0
(79.2)
Operating Margin
7.7%
9.3%
6.2%
9.8%
7.5%
1.6%
-8.3%
Adjusted Operating Profit
78.0
93.2
108.4
107.8
138.7
163.0
131.1
Adjusted Operating Margin
9.9%
11.6%
10.0%
10.5%
14.7%
13.4%
13.7%
Net Cash Flow from Operations
(19.7)
69.3
34.0
14.9
30.0
NA
NA
Cash flow before Financing
(120.1)
(112.5)
22.7
(106.8)
8.9
NA
NA
5 YR Cumulative Cash flow from Ops
128.5
5 YR Cumulative Cash flow before
Financing
(307.8)
5 YR Cumulative cash flow from Ops
(USD)
167.3
5 YR Cumulative cash flow before Financing
(USD)
(400.8)
In the context of considering what is in shareholders’ best
long-term interests, a refreshed Board should also contemplate the
consequences of management spending its energy and time on what we
deem a black hole of a segment. Most of the value Hasbro can derive
from having its own entertainment arm could likely be obtained via
less risky collaborations with other production entities and
studios, including the many with better capabilities and track
records. We assume the Board is aware that owning a production
entity is not a prerequisite for brands to produce and monetize
their intellectual property. Hasbro should be partnering with
production and distribution partners instead of taking on the
capital and execution risk of managing these processes.
To put a finer point on it, Hasbro does not need to own eOne in
order to bring Dungeons & Dragons to the big screen, much like
George R.R. Martin did not need his own production studio to bring
Game of Thrones to life. Along the same lines, the Board should
think about the massive opportunity cost for the Company with
regards to the return on invested capital (“ROIC”) that can be
gleaned from eOne versus other segments, particularly WOTC. Our own
analysis suggests eOne is a terrible ROIC story for Hasbro. We fear
that the eOne deal has created a perverse incentive for the Board
to prioritize content production linked to legacy Hasbro brands and
intellectual property even though it is not the best use of
shareholders’ resources. Without the pressure of trying to prove
that the eOne deal made sense, the Board could be singularly
focused on the core business and supercharging the growth of
WOTC.
It is equally critical for a refreshed Board to reflect on how
the eOne deal has adversely impacted Hasbro’s valuation multiple
due to balance sheet leverage and the perceived complexity and
execution risk that was added to the corporate story. For
reference, in July 2019 (prior to the eOne deal announcement in
August 2019), Hasbro’s forward Enterprise Value/EBITDA multiple was
approximately 15x. This was also prior to Hasbro disclosing the
size, growth trajectory and margin profile of its WOTC segment, so
the market was effectively ascribing a high multiple for Hasbro’s
consumer toy and game business with an unlevered balance sheet.
Today, Hasbro is trading at an approximately 10.5x Enterprise
Value/EBITDA multiple despite WOTC being disclosed as its own
segment and now representing nearly 50% of consolidated EBITDA
versus roughly 20% of consolidated EBITDA in 2019. The
value-destructive acquisition of eOne has resulted in not only a
levered balance sheet, but a significant decrease in ROIC.
Contracting returns on capital has a similarly dampening impact on
valuation, as higher return businesses trade at higher
multiples.
For Hasbro, the consequences of the eOne acquisition are
extremely evident in the negative impact it has had on overall
ROIC. This point is irrefutable. As shown below, Hasbro also
revised its own ROIC calculation following the eOne deal in order
to make the metric more favorable for the Company. The exhibit
below details a comparison of a standard ROIC calculation versus
the methodology utilized by Hasbro from 2016 to 2019. We note the
first quarter 2022 metric is annualized to make the comparisons
appropriate.
FY
FY
FY
FY
FY
FY
Q1
2016
2017
2018
2019
2020
2021
2022
Adjusted EBITDA (Non-GAAP)
977.2
1,036.3
796.5
911.1
1,015.2
1,214.0
174.0
NOPAT Adjustments:
Less Depreciation
119.7
143.0
139.3
133.5
120.2
163.3
25.1
Rent Expense
52.6
63.6
65.2
68.9
90.6
88.2
22.3
Lease-Related Interest
4.5
5.4
5.5
5.8
8.3
7.1
1.7
Adjusted EBITA
905.6
951.5
716.8
840.7
977.3
1,131.8
169.5
Cash Taxes
199.2
209.3
157.7
185.0
215.0
249.0
37.3
NOPAT
706.4
742.2
559.1
655.7
762.3
882.8
132.2
ROIC
19.5%
19.7%
15.1%
12.2%
9.5%
11.4%
7.3%
ROIC (prior methodology):
Net Earnings - as adjusted
566.1
693.1
488.8
524.7
514.6
723.4
79.4
Total Debt
1,721.0
1,848.6
1,704.8
1,697.1
5,099.2
4,201.4
3,997.8
Total Equity
1,900.1
2,126.5
2,022.8
1,938.6
3,253.2
3,381.7
3,122.4
Total Invested Capital
3,621.1
3,975.0
3,727.7
3,635.7
8,352.4
7,583.1
7,120.2
ROIC (adjusted) - Prior
Methodology
15.6%
17.4%
13.1%
14.4%
6.2%
9.5%
4.5%
While the Board may be reluctant to cut its losses soon on a
highly dilutive and debt-funded acquisition that saw Hasbro issue
10 million new shares, shareholders should not have to continually
suffer the consequences of what is obviously a flawed deal. The
Board needs to consider Mattel’s acquisition of The Learning
Company in the late 1990s. After making a bad acquisition and
throwing good money after bad for a multi-year period, Mattel
ultimately did the right thing and sold The Learning Company in the
early 2000s. Ironically, Mattel required engaged shareholder
intervention to divest The Learning Company. Unfortunately, the
Board’s inaction is putting Hasbro in the same position today.
We suspect Hasbro could recoup up to $2 billion via a sale of
eOne, as well as gain meaningful future tax benefits associated
with the acknowledged loss. There may be multiple ways to extract
value for the asset while still retaining rights to Peppa Pig and
PJ Masks, as eOne’s film content library was valued at $2.5 billion
(USD) as of March 31, 2018. Proceeds could be used to pay down debt
and make long-term investments in growing segments. Further, a
divestiture of the eOne business will streamline the current
convoluted conglomerate structure, which will reduce the
operational complexity, inefficiency and hidden costs that often
lead to depressed valuation multiples for conglomerates.
3. Reevaluate Alternatives for WOTC as
Conditions Permit – A refreshed Board should continually
assess strategic alternatives, including a tax-free spin, for the
WOTC segment. We consider WOTC to be an exceptional business that
deserves strong focus and investment. But the fact is the market
has not been giving Hasbro nearly enough credit for WOTC, as
evidenced by the Company’s lagging share price over the long-term.
It gives us great concern that you apparently rejected this reality
when recently concluding that it is best for shareholders to keep
WOTC within Hasbro’s corporate structure. Our analysis indicates a
spin of WOTC could unlock more than 75% upside value from Hasbro’s
current share price.1 As far as we can tell, the Board does not
have any plans that aim to produce similar value over the near-term
or long-term.
WOTC is a fantastic segment, coupling great growth potential
with high EBITDA margins and returns on capital. Businesses with
these characteristics will warrant premium multiples as standalone
entities, which is something that is unlikely to happen in Hasbro’s
confusing conglomerate configuration and for as long as the "Brand
Blueprint" remains the north star.
Though our initial outreach apparently fell on deaf ears, we
still welcome the opportunity to meet with you to share more
detailed analysis and provide specific recommendations for
repositioning Hasbro as a leader. There is no reason to continue
doubling down on the governance missteps that have eroded the
Company’s foundation and resulted in sustained underperformance. If
the Board takes the right steps today, as Mr. Cocks begins his
tenure as Chief Executive Officer, we believe it will result in
superior value creation for shareholders and stakeholders over the
long-term.
Sincerely,
Fredrick D. DiSanto
James Chadwick
Chief Executive Officer and Executive
Chairman
President
Ancora Holdings Group, LLC
Ancora Alternatives LLC
***
About Ancora
Founded in 2003, Ancora Holdings Group, LLC offers integrated
investment advisory, wealth management and retirement plan services
to individuals and institutions across the United States. The
firm's comprehensive service offering is complemented by a
dedicated team that has the breadth of expertise and operational
structure of a global institution, with the responsiveness and
flexibility of a boutique firm. For more information about Ancora,
please visit https://ancora.net.
1 Ancora’s base case sum of the parts valuation for Hasbro
assumes an 18x multiple for WOTC, resulting in a $155-$160/share
price representing 75% or more upside from current share price
levels. This valuation multiple splits the difference between the
average multiple of current video game publishers (~14x) and
dominant technology companies with similar financial profiles as
WOTC (~21x).
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220503005460/en/
Ancora Holdings Group, LLC Rachel Jerpbak
rjerpbak@ancora.net
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