Breakingviews: Peppa Pig buyer risks going too high on hog

Hasbro’s $4 billion deal to buy the studio behind Peppa Pig may not end as happily as most episodes of the porcine preschool cartoon. Misadventures never prevent Peppa and her family from rolling on the floor giddily, but there is a danger the acquisition of Entertainment One gets stuck in the slop.

The $14 billion maker of Nerf guns and the Monopoly board game has at least identified some juicy slabs of fat to cut at the British studio. Hasbro reckons that by 2022 there will be about $130 million of synergies available by slashing costs and improving Entertainment One’s margins on licensing and merchandising. Those would be worth about $975 million today, once taxed and capitalized, or nearly 40% more than the dollar value of the premium Hasbro is paying.

To finance the deal, however, Hasbro boss Brian Goldner intends to stretch the company’s balance sheet. The plan is to lard on as much as $3 billion of debt, catapulting its borrowing to some 4.3 times EBITDA from just 1.6 times now. Up to $1.25 billion of newly issued stock will cover the rest of the tab, diluting existing shareholders by almost 10%.

There are some things working in Hasbro’s favor. Its market value has increased by nearly 40% this year, which should dampen the impact of ending its stock buyback program to help pay down debt. Borrowing costs are also ultra-low. And with some $700 million in annual free cash, getting leverage back below a target of 2.5 times EBITDA within four years may not be a stretch.

At the same time, however, Hasbro is caught in the trade war. About two-thirds of the products it sold in the United States last year came from China. It thinks it can get that down to half by the end of next year, but the chief financial officer made clear last month that tariffs “would be very disruptive to our business and consumers in the near term”. Growing signs of an impending recession won’t help either.

Throwing a chunky takeover into the mix could leave Goldner wrestling with cutting the dividend or sacrificing Hasbro’s credit rating. Owning Peppa Pig will mean navigating muddy puddles.