Hasbro may not be most profitable LBO plaything

June 25, 2010

Hasbro may make some of the world’s most iconic toys, but it wouldn’t necessarily make a great plaything for private equity barons. True, the maker of G.I. Joe action figures and Play-Doh — which said it rejected a buyout approach — has great brands for the under-10 set. But the seasonal toy business would be expensive to finance with real — rather than Monopoly — money. Even with big cuts, the potential returns from a deal look meager.

On the face of it, Hasbro looks like an attractive addition to private equity’s toy chest. Its iconic products range from Mr. Potato Head figurines and Nerf footballs, to classic board games like Scrabble and Candy Land. But the toy business has its many ups and downs. Children are fickle customers, after all, and two-thirds of sales typically come in the third and fourth quarters alone.

As a result, any buyer of Hasbro would need to stump up a big equity check. Tag on a 30 percent premium to Wednesday’s closing stock price — before revelations of a deal appeared in the Wall Street Journal — and that’s around $53.50 a share, or $8.4 billion including debt. If banks are willing to extend debt of around six times EBITDA, a buyer would need to come up with around $3.8 billion in equity.

That’s doable, but would almost certainly require a consortium of private equity firms or outside investors. And even with all that capital, bankers say a Hasbro with so much leverage would have to pay a relatively rich 9 percent interest rate to its creditors. The combination of expensive debt, plus lots of equity, would dampen returns.

Of course, under new, disciplined private equity ownership, Hasbro might be able to squeeze out more profits, perhaps growing its operating margin to, say, 19 percent from the 16 percent analysts currently forecast. But assuming an exit at the same multiple of earnings the company traded at before a bid emerged, the annualized returns would still be shy of around 10 percent. Given the risks, that’s hardly a reason to shout Yahtzee!

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