Why Hasbro's $4 Billion Studio Buy May Trigger More Media Mergers

Entertainment One’s Peppa Pig franchise is broadcast in more than 180 territories.

The toymaker's move to snap up Entertainment One is another salvo in an M&A shootout that puts more smaller and mid-sized entertainment companies — such as Lionsgate, AMC Networks and MGM — in play.

Hasbro’s disclosure on Aug. 22 that it will pay $4 billion to acquire indie studio Entertainment One is largely the toymaker’s way of piggybacking on a cartoon farm animal that is popular in China, and observers are saying that the deal also has ramifications for an entertainment industry in the throes of merger fury and desperate for inroads into a giant overseas marketplace.

EOne’s most notable asset is Peppa Pig, a preschool show from the U.K. that has been endorsed by the People’s Liberation Army in China, a country sporting a population of 1.4 billion and poised to become the largest box office market in the world. Clips of the show have gone viral in both the pop and underground culture in China, and a Peppa Pig theme park opened in Shanghai in 2019, the Year of the Pig.

Peppa isn’t the only property bringing home the bacon for eOne, as it also has the superhero franchise PJ Masks, and Hasbro-eOne has high hopes for Ricky Zoom, an animated show about an adventurous little motorbike that makes its way to Nickelodeon in September.

EOne CEO Brian Goldner told analysts Thursday that there is "great traction" for Peppa Pig in China since launching in August 2016 on CCTV, the national public broadcaster. Peppa is also on multiple Chinese VOD platforms, including Youku, IQiyi and Tencent, and eOne last year named Alpha Group its master toy partner for Peppa in China.

Hasbro has also been working with CCTV to co-produce content for its Transformers brand, "and we think together it really starts to give us a real opportunity for a beachhead that can go in China for many years to come," Goldner told analysts.

"The addition of the Peppa Pig and PJ Masks brands offers Hasbro a pipeline into China, as well as other parts of the world,” says Jackie Breyer, editorial director of the Toy Book and the Toy Insider trade publications.

Hasbro already has an enviable stable of proprietary brands, including the recently acquired Power Rangers franchise, but it has been focused on toy-based entertainment and entertainment-based toys, while eOne has expertise in film and TV production and distribution, notes Breyer.

While Hasbro has a presence in the preschool toy space, it lacked proprietary preschool entertainment brands, an oversight largely fixed by the eOne acquisition, analysts say, though in the near term it isn’t expected to alter Hasbro’s movie ambitions.

Hasbro, in fact, is in the middle of a five-year deal with Paramount to continue making films based not only on Transformers but also the G.I. Joe and Dungeons & Dragons brands, among others. The G.I. Joe film franchise is in the process of being rebooted with new offering Snake Eyes casting up; it will be the first G.I. Joe movie since 2013’s G.I. Joe: Retaliation. Others are in active development.

The movies and television shows, including a popular Transformers animated series for Netflix, are made via Hasbro’s AllSpark Pictures and AllSpark Animation, and Paramount stands to initially benefit from the deal as it will give the studio more IP to mine.

Meanwhile, many are predicting that Hasbro’s move is another salvo in an M&A shootout that puts more smaller and mid-sized entertainment companies — such as Lionsgate, AMC Networks and MGM — in play.

“Hasbro’s acquisition of Entertainment One speaks volumes as to the true intrinsic value of certain television and film franchises, brands, IP and libraries and proves there really is interest in these assets from both those in the industry, as well as from entities in other industries,” said FBN Securities analyst Robert Routh.

He also noted that eOne is “being valued at a huge multiple” of 13.76 times its estimated 2020 earnings before interest, taxes, depreciation and amortization of $241.1 million, whereas most other mid-sized content companies are valued — for now — at a mid-single-digit multiple.

If Lionsgate were valued at the same multiple that Hasbro put on eOne, “its equity would be $36.36 per share rather than $10.41, or 249.13 percent higher than where it currently is,” said Routh.

“This deal could trigger a mini 'media merger frenzy' due to the scarcity value studio operators have,” he said.

Thus far, investors aren’t buying it — or haven’t connected the dots — as Lionsgate and AMC Networks shares didn’t move much in Friday trading, while MGM isn’t publicly traded.

Hasbro could be among the buyers of additional entertainment firms over time, Routh says, noting that Goldner sits on the board of CBS and will be on the board of the merged ViacomCBS, which has already made overtures to acquire Lionsgate. And another Wall Street observer wondered on Friday if toy giant Mattel may shoot back at Hasbro with an acquisition of a company similar to eOne.

Plus, bankers have repeatedly wondered when technology giants, such as Apple, Google or Facebook, could buy entertainment firms. “Hasbro likely isn’t the only one in an industry outside of what most would consider television and film that is looking for ways to acquire franchises and brands they can leverage,” said Routh.

While several observers noted that Brexit uncertainty has weakened the pound, and was therefore a catalyst for Hasbro given that eOne’s stock is listed in London, they focused on how the deal would transform the toy giant into more of an entertainment company. Great timing, given that Netflix and its ilk are on a desperate hunt for children’s programming as Disney hoards its content for Disney+, a $6.99-per-month streamer set to launch in November.

The acquisition “serves an appealing dual purpose of expanding the company's portfolio of owned IP assets while also increasing its media production capabilities at a time when demand for franchisable, global content is at an all-time high,” MKM Partners analyst Eric Handler said of Hasbro.

It’s not a slam dunk, however, notes Stifel analyst Drew Crum. “There is inherent risk that accompanies the film and television production business,” which accounted for 80 percent-plus of eOne’s latest fiscal year revenue. Plus, the company recently completed a restructuring of its film division.

Handler notes that Peppa Pig and PJ Masks accounted for $1.35 billion and $1.15 billion in worldwide retail sales, respectively, for eOne’s fiscal year ended in March. Both “appear to have long runways for growth, especially in China.” 

Borys Kit contributed to this report.