4 reasons why Hasbro's $4 billion takeover of Entertainment One makes sense

Hasbro can expand its brand portfolio and reach a broader audience

Hasbro's takeover of Entertainment One should strengthen its brand portfolio.

The toymaker counts Monopoly, Transformers, Nerf, and My Little Pony among its brands. Buying Entertainment One will add children's cartoon franchises such as Peppa Pig and PJ Masks — which generated $2.5 billion in retail sales last year — to the mix.

The deal will also give Hasbro new ways to reach audiences, and talented TV and film executives to bring its brands to life.

Entertainment One boasts a network of film distributors (Sierra/Affinity), TV producers (Whizz Kid Entertainment), live entertainment groups (Round Room Entertainment), and music labels (Dualtone Music Group).

It also recently signed a multi-year deal with producer Mark Gordon, whose credits include Grey's Anatomy, Steve Jobs, and War Dogs.

Hasbro's sales and profits should benefit

The tie-up should boost Hasbro's revenues and profits.

Entertainment One is growing quickly. Its sales are forecast to rise by more than 10% this financial year and next. Meanwhile, Hasbro's sales are predicted to climb 9% this year then 4% in 2020.

Profits are a similar story. Entertainment One's operating income jumped 14% in the year to March 2018 and 11% last financial year. In contrast, Hasbro's operating income dipped 1% in 2017 then plunged 26% in 2018, as the bankruptcy of key customer Toys R Us took a heavy toll.

Hasbro also expects substantial revenue and cost benefits from the combination. It anticipates $130 million in annual synergies by 2022, partly from moving a chunk of Entertainment One's toy business in house and squeezing higher profits from its licensing and merchandising business.

The toymaker expects the deal to lift adjusted earnings per share in the year it closes, excluding transaction costs and other one-off expenses. It also predicts the tie-up will boost EPS by roughly 14% to 19% after three years.

Hasbro gains access to a $2 billion content library

Buying Entertainment One will give Hasbro access to a vast amount of content.

The media group's content library, which includes about 80,000 hours of movies and TV shows and about 40,000 music tracks, was last valued at $2 billion.

Armed with that media stockpile and Entertainment One's expertise in production and distribution, Hasbro could easily roll out a streaming service and develop original shows and movies showcasing its brands, fueling demand for its toys and games.

It could also strike licensing deals with Netflix, Amazon, Apple, Disney, and other companies hungry for content.

Hasbro paid a high price, but it looks fair

Hasbro's offer of £5.60 ($6.84) per share represents a 31% premium to Entertainment One's average share price over the past month, reflecting the media group's future growth potential.

The bid is about 22 times the media group's forecast EPS for this financial year. That looks lofty at first glance, but Disney's recent success at the box office, Netflix and Spotify's continued gains, and Apple's aggressive investments in original TV shows and movies underline the entertainment industry's rich growth potential.