It’s been a few days since Hasbro (HAS) announced that it would explore selling its eOne television and film business as part of its ongoing strategic review process. 

“Following our recent Investor Day where we introduced our new branded entertainment strategy, Blueprint 2.0, we received inbound interest from several parties for the part of the eOne television and film business that while valuable is not core to our go-forward strategy. This interest informed our decision to explore a sale process,” said Chris Cocks, Hasbro’s Chief Executive Officer.

If you owned Hasbro stock since the company paid $4.6 billion for eOne in 2019 and still own it today, you’re likely pleased that it’s getting rid of an asset that never made much sense to own. 

Buying eOne weakened Hasbro’s position within the toy industry. Does selling it make Hasbro stock a buy?

Yes and no. Here’s why.

Hasbro Overpaid for eOne in the First Place

Warren Buffett likes to say, “Price is what you pay. Value is what you get.”

Corporate America is littered with failed acquisitions where ego-driven management teams and their boards paid too much for an asset, overestimating the asset's contribution once fully integrated into the existing business. 

In December 2019, Hasbro acquired Entertainment One Ltd. (eOne) for $3.8 billion in cash and the repayment of $800 million for outstanding senior secured notes and the payoff of its credit facility. 

In October, I discussed this issue in a Barchart article about activist investor Alta Fox Capital Management’s problems with the acquisition and overall management of Hasbro’s business.

Alta Fox wrote in an April open letter to Hasbro shareholders that called the deal “illogical” because it diluted shareholders, tied massive debt to its balance sheet, and paid significantly more than it should have for an asset that cluttered the Hasbro story. 

“We are excited about what we can do together and see tremendous opportunity for shareholder value creation through this acquisition,” Brian Goldner, Hasbro chairman and CEO, said in a statement upon closing the deal.

Significant Shareholder Destruction

In May 2022, Ancora Holdings Group LLC, another activist investor, emailed Hasbro’s board, outlining why Hasbro’s conglomerate-like qualities had destroyed shareholder value. You can read the letter here.

It suggested three near-term actions the company could take to deliver long-term value for shareholders. 

1. Refresh the board: Add board members with skills such as “capital allocation, corporate governance, finance, transactions and transformations.”

2. Pursue a full or partial sale of eOne: Ancora believes that the company’s move into content production has been a failure.

3. The company should consider spinning off Wizards of the Coast: The value of this business is not getting the recognition it deserves within Hasbro.

While Ancora’s main arguments are very similar to those proposed by Alta Fox, investors with meaningful investments in the company need to step forward and force the company into action. 

Ancora’s letter points out that since Hasbro has owned eOne, its return on invested capital (ROIC) has dropped from 19.5% in 2015 to 7.3% in Q1 2022. 

“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,” Ancora wrote. 

“... 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.”

Hasbro’s listened to the activists. But is it too late?

What’s Hasbro Keeping?

The company plans to sell the parts of eOne that aren’t directly related to its core brands, such as Magic: The Gathering, Dungeons & Dragons, Hasbro Gaming, Nerf, Transformers, Play-Doh, and Peppa Pig. 

“Assets for the award-winning eOne Film & Television division that are a part of the potential sale include a 6,500+ content library, the non-Hasbro branded film and scripted TV business, which produces and finances top tier content like The Woman King, Yellowjackets and The Rookie franchise, Hasbro’s interest in Entertainment One Canada Limited’s Canadian film and TV business, and Hasbro’s category-leading unscripted division which includes hits like the Naked & Afraid franchise.”

There is no question that these assets are valuable to a buyer in the right hands. However, the process will take several months. 

In the meantime, Ancora’s May sum-of-the-parts assessment of Hasbro’s three businesses suggested the company’s stock could be trading at a 75% discount to intrinsic value. 

Were Hasbro to sell these parts of eOne for $2 billion and use 100% of the after-tax proceeds to pay down debt, the long-term debt would be cut by 40% or more overnight without diminishing revenues by too much.

If it were my money on the line, I would wait for a sale to be announced before contemplating investing in Hasbro. Even then, as Ancora and Alta Fox stated, its Wizards of the Coast business isn’t getting the valuation it deserves.

That likely won’t change until it announces it is spinning off its most profitable operating segment. There are better bets available within the toy industry.

The news doesn’t change the fact that Hasbro’s got a lot of work to do to regain investors' trust.  

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