Equity Method Investment

12 Months Ended

Dec. 26, 2021

Equity Method Investments and Joint Ventures [Abstract]

Equity Method Investment

Equity Method Investment

The Company owns an interest in a joint venture, Discovery Family Channel (the “Network”), with Discovery. The Company has determined that it does not meet the control requirements to consolidate the Network and accounts for the investment using the equity method of accounting. The Network was established to create a cable television network in the United States dedicated to high-quality children’s and family entertainment. In October 2009, the Company purchased an initial 50% share in the Network for a payment of $300.0 million and certain future tax payments based on the value of certain tax benefits expected to be received by the Company. On September 23, 2014, the Company and Discovery amended their relationship with respect to the Network and Discovery increased its equity interest in the Network to 60% while the Company retained a 40% equity interest in the Network.

As of December 26, 2021 and December 27, 2020, the Company’s investment in the Network totaled $161.2 million and $216.6 million, respectively. During the fourth quarter of 2021, the Company reviewed its investment with Discovery for impairment and concluded that the fair value of the Company's interest in the joint venture was less than its carrying value, and as such, recorded an impairment loss of $74.1 million, which is included in other (income) expense, net in the consolidated statements of operations for the year ended December 26, 2021. The Company utilized the discounted cash flow method under the income approach to estimate the fair value of the

Network, which requires assumptions and estimates that include: future annual cash flows, income tax rates, discount rates, estimated growth rates, and other market factors. Recent accelerating changes in the cable distribution industry, including technological changes and expanding options for digital content offerings, has resulted in the fragmentation of viewership, declines in subscribers to the traditional cable bundle, and pricing pressure. These factors led to the lower valuation of the Network as compared to its carrying value.

The Company’s share in the earnings of the Network for the years ended December 26, 2021, December 27, 2020 and December 29, 2019 totaled $20.8 million, $21.8 million and $23.6 million, respectively, and is included as a component of other expense (income), net in the consolidated statements of operations. The Company also enters into certain other transactions with the Network. During 2021, 2020 and 2019, these transactions were not material.

In connection with the amendment, the Company and Discovery entered into an option agreement to acquire the Company’s remaining 40% ownership in the Network, exercisable during the one-year period following December 31, 2021. The exercise price of the option agreement is based upon 80% of the then fair market value of the Network, subject to a fair market value floor. At December 26, 2021 and December 27, 2020, the fair market value of this option was $1.7 million and $20.6 million, respectively, and was included as a component of other liabilities. The change in the option's value was driven by the impairment loss recorded on the Company's investment in the Network. During 2021, 2020 and 2019, the Company recorded gains of $20.1 million, $1.5 million and $1.3 million in other (income) expense, net relating to the change in fair value of this option.

The Company also has a related liability due to Discovery under the existing tax sharing agreement. The balance of the associated liability, including imputed interest, was $18.3 million and $19.9 million at December 26, 2021 and December 27, 2020, respectively, and is included as a component of other liabilities in the accompanying consolidated balance sheets. The Company recognized a loss of $2.1 million in the fourth quarter of 2021 related to an increase of this liability. This was caused by a change in the Company's 2020 tax rate that resulted in future payments owed to the Network. During 2021, 2020 and 2019, the Company made payments under the tax sharing agreement to Discovery of $5.3 million, $4.7 million and $4.8 million, respectively. See note 20 for more information on estimated future payments in relation to the Company's Discovery tax sharing agreement.

The Company has a license agreement with the Network that requires the payment of royalties by the Company to the Network based on a percentage of revenue derived from products related to television shows broadcast by the joint venture. The license includes a minimum royalty guarantee of $125.0 million, which was paid in five annual installments of $25.0 million per year, commencing in 2009, which can be earned out over approximately a 12-year period. As of December 26, 2021 the Company did not have a prepaid royalty balance related to this agreement as the licensing agreement ended in 2021. As of December 27, 2020 the Company's prepaid royalties related to this agreement were $15.1 million, all of which were included in prepaid expenses and other current assets. Beginning in 2021, the Company and the Network agreed that Hasbro would no longer provide the Network with new content. Previous to this amendment, the parties were subject to an agreement under which the Company would provide the Network with an exclusive first look in the U.S. to license certain types of programming developed by the Company based on its intellectual property. In the event the Network licenses the programming from the Company to air, it is required to pay the Company a license fee.