Fans of tabletop gaming should be aware of Wizards of the Coast, as well as their parent company Hasbro. These companies have been responsible for multiple beloved toy and board game licenses including Power Rangers,Transformers, My Little Pony, Dungeons & Dragons, and Magic: The Gathering. Those last two series are of particular importance since they are greatly associated with Wizards of the Coast, a company that has seen considerable growth recently. However, certain investors and shareholders of Hasbro believe that this growth could be improved upon if a spinoff was to occur.
The story begins with one of Hasbro's key stakeholders, Alta Fox Capital Management, nominating five candidates to the company's board of directors. Shortly thereafter, Alta Fox Capital released a 100 page deck outlining recommendations to help Hasbro increase their profit and growth.
Among the recommendations was to spinoff their subsidiary Wizards of the Coast. For context, a spinoff is where a larger company basically splits off one of their subsidiaries as an independent company outside the of the larger parent company with its own set of shares. In this case, Hasbro essentially would still own Wizards of the Coast, as the new set of shares would be doled out proportionally to current Hasbro shareholders. There would then just be two sets of shares, with Wizards of the Coast having its own separate set of shares and its own management outside of Hasbro.
A business move Alta Fox Capital Management has made very explicit by their page deck address being called "Free The Wizards" and that one of the individuals they have nominated to the board is Magic: The Gathering legend Jon Finkel, who has publicly stated his desire for the iconic card game to grow under a change of management. A notion that Alta Fox's own Managing Partner Connor Haley shared, stating that competitive Magic has been going downhill under Hasbro's tutelage.
However, this desire for a Hasbro spinoff isn't just an appeal to creative freedoms and player satisfaction, it is also heavily based in finance.
It was recently disclosed that WOTC grew revenues by 42% to nearly $1.29 billion in 2021. Our own analysis and estimates suggest WOTC’s contribution to Hasbro’s total EBITDA has increased from approximately 20% in 2016 to almost 50% in 2021. As an independent business, we believe WOTC would be worth more than $100 per share today. We also anticipate it would be one of the most exciting and valuable specialty gaming businesses in the world, particularly if it were to refocus investment on core intellectual property and eliminate loss-driving, speculative bets on non-core franchises.
In sum, there are very few companies that have the respective three-decade and five-decade track records of Magic: The Gathering and Dungeons & Dragons while also generating double-digit topline growth with more than 40% EBITDA margins and excellent returns on invested capital. Based on Hasbro’s current valuation and our conservative fair value estimate of the Company’s two other segments, shareholders are currently paying approximately 11.8x estimated 2023 EBITDA to own WOTC. If WOTC was separated in a tax-free spin-off with proper disclosures, we believe it would trade at more than 20x EBITDA, or more than $100 per share, unlocking approximately 100% upside for Hasbro shareholders.
As for why Alta Fox are taking such drastic measures rather than appealing to the current executive board, they've tried. In the same business post, they stated that, "We have attempted to collaborate with Hasbro, but it continues to cling to its failed “Brand Blueprint” strategy. We cannot stand idly by as Hasbro’s Board of Directors (the “Board”) makes unforced errors in capital allocation, corporate governance and investor communication. We believe the Board’s intransigence and missteps are eroding the market share and prominence of one of America’s most iconic companies. If corrective action is not taken in the near-term, we fear there will be an irreversible impairment of value at Hasbro." That same post mentioned that Wizards of the Coast was the most valuable and had the greatest potential for growth, laying out a three-year plan for this venture going forward.
As for what this could mean for Wizards of the Coast in the future for players, it is too early to say. An optimistic view is that a spinoff could lead to greater overall creative freedoms for their projects, which can translate into better experiences for fans.