Business Combination

3 Months Ended

Mar. 29, 2020

On December 30, 2019, the Company completed its acquisition of eOne, a global independent studio that specializes in the development, acquisition, production, financing, distribution and sales of entertainment content. eOne's principal brand, PEPPA PIG, which was launched in the United Kingdom in May 2004, entertains pre-school children worldwide with much of its historical revenue generated through licensing and merchandising programs across multiple retail categories. eOne’s portfolio of pre-school brands also includes PJ MASKS and RICKY ZOOM.

The addition of eOne accelerates the Company's brand blueprint strategy by expanding our brand portfolio with eOne's global preschool brands, adding proven TV and film expertise and executive leadership as well as by enhancing brand building capabilities and our storytelling capabilities to strengthen Hasbro brands.

The all-cash transaction was valued at approximately £2,900,000 based on the consideration of £5.60 per common share of eOne. Converted at the rate of $1.31 USD/GBP on December 30, 2019, the cash consideration for shares outstanding was approximately $3,658,000. The Company also redeemed eOne's outstanding senior secured notes and paid off the debt

outstanding under eOne's revolving credit facility, which together represent approximately $831,000 of eOne's indebtedness. The total cash consideration transferred by the Company was approximately $4,635,000.

The total consideration transferred, in thousands of dollars except per share data, was as follows:



Acquisition Consideration
eOne common shares outstanding as of December 30, 2019	498,040
Cash consideration per share	$	7.35
Total consideration for shares outstanding	3,658,345
Cash consideration for employee share based payment awards outstanding	145,566
Cash consideration for extinguishment of debt	831,130
Total cash consideration	4,635,041
Less: Employee awards to be recorded as future stock compensation expense	47,399
Total consideration transferred	$	4,587,642

The Company financed the acquisition with proceeds from the following debt and equity financings: (1) the issuance of senior unsecured notes in an aggregate principal amount of $2,375,000 in November 2019, (2) the issuance of 10,592 shares of common stock at a public offering price of $95.00 per share in November 2019 (resulting in net proceeds of $975,185) and (3) $1,000,000 in term loans provided by a term loan agreement, which were borrowed on the date of closing. See Note 6 for further discussion of the issuance of the senior unsecured notes and term loan agreement.

The acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations (“Topic 805”). Pursuant to Topic 805, the Company allocated the eOne purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 30, 2019. The excess of the purchase price over those fair values was recorded to goodwill. The Company's evaluations of the facts and circumstances available as of December 30, 2019, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, are ongoing. As we complete further analysis of assets including program rights, investment in films and television content, intangible assets, as well as deferred revenue, noncontrolling interest, tax and certain other liabilities, additional information on the assets acquired and liabilities assumed may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and as a result, the preliminary fair values set forth below are subject to adjustment as additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

The following table summarizes our preliminary allocation of the December 30, 2019 eOne purchase price (in thousands of dollars):



	Estimated Fair Value
Cash, cash equivalents and restricted cash	$	183,713
Accounts receivable, net	259,061
Inventories	7,029
Other current assets	286,270
Property, plant and equipment (including right of use assets)	90,339
Intangible assets	1,055,249
Content assets - IIC and IIP	751,524
Other assets	183,209
Short-term borrowings	(60,533		)
Accounts payable, and accrued liabilities	(772,097		)
Long-term debt (including current portion)	(149,118		)
Other liabilities	(262,644		)
Noncontrolling interests	(63,541		)
Estimated fair value of net assets acquired	1,508,461
Goodwill	3,079,181
Total purchase price	$	4,587,642

Intangible assets consist of intellectual property associated with established brands, eOne artist relationships, eOne music catalogs and trademarks and tradenames with estimated useful lives ranging from 7 to 15 years, determined based on when the related cash flows are expected to be realized. The fair value of the intangible assets acquired was determined based on the estimated future cash flows to be generated from the acquired assets, considering assumptions related to contract renewal rates and estimated brand franchise revenue growth.

Investments in productions and content includes the fair value of completed films and television programs which have been produced by eOne or for which eOne has acquired distribution rights, as well as the fair value of films and television programs in production, pre-production and development. For films and television programs, fair values were estimated based on forecasted cash flows, discounted to present value. For titles less than 3 years old and titles in development, the content assets will be amortized using the individual film forecast method, wherein the amortization will phase to the revenues incurred. For titles over 3 years, the estimated useful life is 10 years, and will be amortized straight-line over that period.

Deferred tax liabilities within other liabilities were adjusted to record the deferred tax impact of purchase price accounting adjustments, primarily related to intangible assets.

Other fair value adjustments were made to accounts receivable, net and other assets to reflect the fair value of certain assets upon acquisition.

The former eOne senior notes were adjusted to fair value prior to extinguishment using quoted market values, and the fair value of the outstanding amounts under eOne's credit facility were estimated to approximate their carrying values.

Goodwill of $3,079,181 represents the excess of the purchase price over the fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition goodwill represents the value placed on the combined company’s brand building capabilities, our storytelling capabilities and franchise economics in TV, film and other mediums to strengthen Hasbro brands. In addition, the acquisition goodwill depicts added benefits of long-term profitable growth through in-sourcing toy and game production for the acquired pre-school brands and cost-synergies, as well as future revenue growth opportunities. The goodwill recorded as part of this acquisition is included in the newly created eOne segment. The goodwill associated with the fair value step-up of the acquisition will not be amortized for financial reporting purposes and will not be deductible for federal tax purposes.

Changes in the carrying amount of goodwill, by operating segment, for the three months ended March 29, 2020 is as follows:



(in thousands of dollars)	U.S and Canada		International		Entertainment, Licensing and Digital		eOne	Total

Balance at December 29,2019	$	291,577	170,218		32,789		—	$	494,584
Acquired during the period	—		—		—		3,079,181	3,079,181
Foreign exchange translation	—		(321	)	(794	)	—	(1,115		)
Balance at March 29, 2020	$	291,577	169,897		31,995		3,079,181	$	3,572,650

The following table summarizes net revenues and loss before income taxes of eOne included in the Company's Consolidated Statement of Operations since the date of acquisition for the quarter ended March 29, 2020 (in thousands of dollars).



	Quarter Ended
	March 29, 2020
eOne:
Net revenues	$	342,493
Loss before income taxes	(33,620		)

In the first quarter of 2020, the Company incurred $149,782 of charges related to the eOne Acquisition, which are recorded in acquisition and related charges within the Company’s Consolidated Statement of Operations. Included within the eOne results above were $77,729 of acquisition and related charges. The remaining charges were included in Corporate and Eliminations.

The acquisition and related costs of $149,782 consist of the following:


•	Acquisition and integration costs of $95,718, including $47,339 of expense associated with the acceleration of eOne stock-based compensation and $38,168 of advisor fees settled at the closing of the acquisition, as well as integration costs; and


•	Restructuring and related costs of $54,064, including severance and retention costs of $13,186, as well as $40,878 in impairment charges for certain definite-lived intangible and production assets. The impairment charges of $40,878 were driven by the change in strategy for the combined company’s entertainment assets.

Pursuant to Topic 805, unaudited supplemental pro forma results of operations for the three months ended March 31, 2019, as if the acquisition of eOne had occurred on December 31, 2018, the first day of the Company’s 2019 fiscal year are presented below (in thousands, except per share amounts):



	Unaudited
	March 31, 2019
Revenues	$	1,198,722
Net earnings	79,134
Net earnings attributable to Hasbro, Inc.	76,405

Net earnings per common share:
Diluted	$	0.56
Basic	$	0.56

The Company acquired eOne on the first day of fiscal year 2020, as such our actual results reflect the acquisition occurring on the first day of the current period.

These pro forma results do not represent financial results that would have been realized had the acquisition occurred on December 31, 2018, nor are they intended to be a projection of future results.

The unaudited pro forma results include certain pro forma adjustments to net earnings that were directly attributable to the acquisition, as if the acquisition had occurred on December 31, 2018, including the following:


•	additional amortization expense of $12,480 that would have been recognized as a result of the allocation of purchase consideration to definite-lived intangible assets subject to amortization;


•	estimated differences in interest expense of $19,105 as a result of incurring new debt and extinguishing historical eOne debt; and

•

the income tax effect of the pro forma adjustments in the amount of $6,570, calculated using a blended statutory income tax rate of 22.5% for the eOne amortization and elimination of historical interest adjustments, and a blended statutory tax rate of 21% for the new debt interest.