Hasbro activist wants toy company to spin-off Wizards of the Coast

An activist investor wants to add new members to Hasbro’s board and is urging the toy company to make changes to its current business strategy, including spinning off its lucrative Wizards of the Coast unit, according to a report by the Wall Street Journal.

Alta Fox Capital Management, which owns a 2.5% stake worth around $325 million, penned a letter to Hasbro shareholders nominating five directors and urging the company to replace its “brand blueprint” strategy with a plan that focuses on growing profitability in its consumer products and entertainment divisions, CNBC confirmed.

The letter suggests that spinning off Wizards of the Coast and digital gaming, which include franchise brands like Dungeons and Dragons and Magic: The Gathering, will increase Hasbro’s share value by $100.

Hasbro’s stock closed at around $97 per share on Wednesday, down about 23% from an all-time high of $126.87 per share achieved prior to the pandemic and prior to the acquisition of Entertainment One (eOne).

Alta Fox argues that Hasbro can double its valuation by spinning off Wizards, which it says has a different growth, margin and valuation profile compared to the company’s other segments. It also seeks to replace Hasbro’s current strategy for developing brands, a blueprint put in place by the company’s late CEO Brian Golder, who unexpectedly passed away last October.

This strategy uses storytelling to drive toys sales. Under Goldner, Hasbro successfully grew beyond just toys and games and into the television, movies and digital gaming space. It uses its toy brands like Transformers and My Little Pony to fuel entertainment content and then that entertainment content to fuel sales of toys. The company is currently producing a Dungeons and Dragons movie and television show through eOne.

It has also used these brands for publishing, apparel and accessories.

“Hasbro engages in regular communication with its shareholders as part of its robust shareholder engagement program and welcomes constructive input,” Hasbro said in a statement to CNBC.

Hasbro said that it has met with Alta Fox and plans to review its nominees “in due course.”

Alta Fox’s letter to share holders comes a week after the company reported a significant fourth-quarter earnings beat, but said it does not expect robust growth in the next few years.

Deborah Thomas, the company’s chief financial officer, said during an earnings call that while the toy and game industry has grown at an above-trend rate over the last two years, the toymaker does not foresee this continuing, saying it expects the industry will slow or decline in the coming year.

Also of note, Hasbro has a new CEO starting on Feb. 25. Chris Cocks, the former Wizards of the Coast president, is taking the reins from interim CEO Rich Stoddart, who held the position after Goldner’s unexpected passing. Analysts speculated that Hasbro may be intentionally setting its goals low for the next few years as Cocks settles into his new post.

Additionally, Hasbro is taking into account the impact the pandemic has had on its film production. Its newest “Transformers” film was delayed until 2023, which translates into delays in ticket sales and product lines. What’s more, Hasbro was the company that held the Disney princess license and lost out to Mattel.

Still, despite pandemic headwinds, including global supply chain disruptions, Hasbro reported that revenue rose 17% to $2.01 billion during the crucial holiday quarter, above analysts’ estimates of $1.87 billion.

Hasbro’s toy division remains 62% of its revenue, or about $3.98 billion in 2021. Growing in significance, however, is Wizards of the Coast and digital gaming, which accounted for $1.28 billion in revenue, or 20% of the company’s total. Entertainment was 17.9% or $1.15 billion.

“The board and management team believe Hasbro is on the right path to deliver sustainable growth for shareholders,” the company said.

Hasbro’s incoming CEO has been part of the Hasbro team since 2016, working primarily with the company’s Dungeons and Dragons, Magic: The Gathering and Duel Masters franchises. Under Cocks’ leadership, Wizards of the Coast has become one of Hasbro’s top revenue drivers, more than doubling since he took the helm.

“Mr. Cocks’s extensive omni-channel experience, demonstrated ability to create and nurture winning brands, and proven track record make him uniquely positioned to accelerate Hasbro’s brand blueprint for supercharged growth while continuing to deliver strong shareholder returns,” the company said.