Toymaker Hasbro Inc. (HAS) recently stated that it was approached by a private equity firm for a leveraged buyout transaction. The company refrained from disclosing the name of the buyer but added that its Board declined the offer.
Earlier on the day of the announcement, the market was abuzz with the rumor that a private equity group named Providence Equity Partners is in talks with Hasbro. Providence Equity Partners is one of the world's leading private equity investment firms focused on media, entertainment, communications as well as information investments. The firm specializes in leveraged buyout transactions and has invested in over 100 companies worldwide since its inception in 1989.
According to industry sources, the proposed buyout, if carried out, would have been the biggest deal of the year by any private equity.
Generally, companies of all sizes and any industry are targeted to leveraged buyout transactions based on the acquired firm's ability to repay its liability after the completion of the buyout. Despite the prevailing Euro zone debt crisis, there should be no dearth of finances to acquire a company like Hasbro, which boasts of stable and recurring cash flows as well as a good credit record. Hasbro's debt position appears modest with a comfortable debt-equity ratio of 0.8 times. As of March 31, 2010, Hasbro had $4.1 billion in assets, $1.4 billion in long-term debt excluding current portion and $1.7 billion in shareholders' equity. As of today, market capitalization of Hasbro stands at $6.23 billion while its enterprise value is $6.40 billion.
We think Hasbro's strong product line-up, lucrative product associations with Universal Pictures and Electronic Arts Inc. (ERTS), and its joint venture with Discovery Channel to provide a high-quality children's television network entitled The HUB make it a strategic fit for acquisition. Furthermore, the company is looking forward to reaping huge gains from the creation of Hasbro Studios, which will produce Habsro-related content for the new HUB network and increase its intrinsic value. Hasbro is the second biggest toymaker after Mattel Inc. (MAT).
Currently, we have a short-term Hold recommendation on Hasbro.
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