Summary
- Hasbro acquires Entertainment One for $4.0bn cash - equal to GBP5.60/share and a 31% premium to its 30-day VWAP.
- The deal could create as much as $130m in annual synergies by 2022 through additional revenue opportunities, in-sourcing and cost synergies.
- Despite the huge premium, ETO closed at GBP 5.85 - a premium of 4.5% above the bid price, suggesting investors’ anticipation for a counter bid.
- While the possibility of a competing bid cannot be ruled out, I think this scenario is unlikely given the premium.
- Going short ETO shares offers an annualised ~19% return.
Hasbro (HAS), a global designer and distributor of toys, games, television programming, film and licensed products, recently announced its acquisition of Entertainment One (OTCPK:ENTMF) (ETO) for GBP 5.60 per share. The proposed price implies a 31% premium to its 30-day volume-weighted average price (VWAP) and an ~21x P/E multiple.
I believe the acquisition will prove value-accretive to HAS in the medium term as the ETO acquisition opens up new markets for HAS, e.g., the pre-school market with brands such as Peppa Pig, PJ Masks and Ricky Zoom, as well as additional growth opportunities through ETO's content portfolio. Cost synergies are also available from in-sourcing and cost overlaps. Annual synergies are set to reach $130m by 2022.
Following the announcement, ETO surged above the bid price of GBP 5.60 and continues to trade at a premium (~4.5% at the time of writing), as the market anticipates more strategic acquirers entering the fray, pushing the premium even higher. I believe, however, that given ETO's already lofty valuations at ~22x (more than double its peers’ average), a counter bid is unlikely. I believe the premium is unsustainable and will ultimately unwind going into the deal close - thus, shorting ETO shares is the play here with a 19.3% annualised return on offer should the deal close in Q4.
HAS Acquires ETO at 31% Premium
HAS recently announced the acquisition of ETO in an all-cash transaction deal valued at GBP 3.3bn or $4.0bn. This translates to a GBP 5.60 per share bid for each common share, a 31% premium to the company’s 30-day VWAP.
Source: Pg 15 of Hasbro Investor Presentation
Considering ETO's strong portfolio of brands such as Peppa Pig and PJ Masks, as well as leading shows such as The Walking Dead and Designated Survivor on Netflix, the acquisition makes a lot of sense for HAS. Through ETO, the company could further benefit from the rising demand for content and to tap into new growth opportunities in the preschool market.
Source: Pg 16 of Entertainment One Investor Presentation
The expected amount of synergies from in-sourcing, cost synergies, savings from in-sourcing of ETO’s licensing and merchandising business and enhancements on profitability is pegged at $130m by 2022.
