News that a private equity firm has shown interest in buying Hasbro (NYSE: HAS) leads to further questions about Hasbro as a possible takeover candidate. The company confirmed that it had been approached by a private equity firm, but it is not pursuing a transaction. It may not be the end of a possible Hasbro deal story.
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A Brief History Of Interest
A source named Providence Equity Partners as the private equity firm that approached Hasbro with the buyout offer. If nothing else, this perked up the interest in the market anew in looking at Hasbro. The stock popped 5 percent on the news. Some have pointed out that Hasbro, along with the other largest toymaker, Mattel (Nasdaq: MAT), has been performing well in a lousy economy and stagnant stock market, so it has been buried in this crummy stock market environment.
Hasbro shares have risen more than 35 percent in this market. Annual earnings have increased from $2.18 per share in fiscal 2008 to $2.70 in 2009 and are well ahead this year after first quarter results. Revenue has been flat at just over $4 billion the last two years. Hasbro has strong brands and innovative licensing arrangements.
Synergies, Alliances And Partnerships
The flat revenue shows why Hasbro, as well as Mattel, may need to do more than intensify strategic alliances with other companies. Already Hasbro has an agreement with Marvel, which is a part of Walt Disney Co. (NYSE: DIS), but Hasbro is looking to go much further by developing content with Discovery Communications (Nasdaq: DISCA). Hasbro and Discovery will launch a children's TV network called "The Hub". This will leverage toys and the brand beyond movie deals that may not only take Hasbro to the next level, but may be a necessary step. Scale in entertainment and media are critical as the Marvel-Disney deal suggested. Scale is seen as critical, not only strategically for content and synergies, but for the companies themselves.
The Next Step
The current environment in entertainment and media places the toy companies on the steps of possible new directions. A natural question is, what would a private equity firm do with Hasbro? A New York Times DealBook piece suggested that a private equity deal for Hasbro would feature meager returns. This assumes the unimaginative scenario of simply buying the company, keeping it relatively as is and squeezing out efficiencies of operations. The private equity interest in Hasbro is far from the end of the story.
Why should the potential interest be limited to private equity? Mattel and Hasbro, the two thriving toy giants, may be compelled to grow larger. What of Hasbro's potential to join with a publicly traded media or entertainment company? The potential for tremendous vertical integration exists. Then there's the idea that Hasbro might aspire to grow itself into such an entity. Hasbro has a real possibility of morphing into a larger entertainment company as its first step with Discovery Communications indicates.
While nothing on the horizon is as compelling and well-fitting as Marvel-Disney, and Mattel looks to be going in a different direction than Hasbro, it's less likely that Hasbro will simply keep its status quo. A fine company like Jakks Pacific (Nasdaq: JAKK) shows the potentially more tenuous position of smaller stand-alone toymakers, which rely heavily on alliances. Hasbro is an attractive, dynamic company that has positioned itself well and given itself many options. It's doubtful this is the last you'll hear of a possible deal. (This investment vehicle attracts wealthy investors to increase the value of portfolio companies. For more information about private equity operations, see What Is Private Equity?)
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