Hasbro shareholder launches campaign to spin off Wizards of the Coast business, a ‘hidden gem’

An image of a female dwarf barbarian in the Dungeons and Dragons 5e Player’s Handbook. (GeekWire Photo / Clare McGrane)

One of Hasbro’s top shareholders has launched a campaign to overhaul Hasbro’s overall business strategy, which includes spinning Hasbro subsidiary Wizards of the Coast off into its own company.

Alta Fox Capital Management, based in Fort Worth, Texas, holds 2.5% of the outstanding shares of Hasbro, Inc. Hasbro, headquartered in Pawtucket, RI, is a toys and entertainment company that acquired Wizards of the Coast for $325 million in 1999.

Wizards of the Coast, based in Renton, Wash., is the publisher behind the Dungeons & Dragons tablet franchise and the collectible card game Magic: The Gathering, Both of which have seen massive revenue growth in the last two years. Hasbro’s overall brand portfolio also includes Transformers, GI Joe, Power Rangers, Monopoly, and My Little Ponyamong others.

Wizards also recently announced that its current president and COO, Chris Cocks, will move up to the CEO chair at Hasbro as of Feb. 25. Cocks will be succeeded as president by new hire Cynthia Williams.

In an open letter to shareholders dated Feb. 17, Alta Fox managing partner Connor Haley argues that Hasbro’s overall business strategy, which it calls its “Brand Blueprint,” is ineffective, and has led to consistently stagnant stock prices and a loss of market share over the course of the last five years.

As part of a five-step plan to address the perceived issue, Haley and Alta Fox have begun a website, Free the Wizards, to take its argument public.

“We [Alta Fox LLC] cannot stand idly by as Hasbro’s Board of Directors (the “Board”) makes unforced errors in capital allocation, corporate governance and investor communication,” Haley writes in the original open letter. “We believe the Board’s intransigence and missteps are eroding the market share and prominence of one of America’s most iconic companies.”

Haley further accuses Hasbro of a “perverse” executive compensation structure, where Hasbro’s senior leadership and directors have allegedly received more than $180 million over the course of the last five years despite the company’s relative underperformance in the market.

Haley claims this “exceeds that paid to the board of directors of Apple, Inc. and many other world-class companies of greater scale and with superior results.”

One part of Alta Fox’s plan involves Wizards of the Coast, which it calls “Hasbro’s hidden gem.” As per Alta Fox’s numbers, Wizards’s overall revenues grew by 42% in 2021, to nearly $1.29 billion, which increased its contribution to Hasbro’s overall earnings before, taxes, depreciation, and amortization (EBITDA) from 20% in 2016 to almost 50% in 2021.

Put another way, Alta Fox claims that Wizards is currently responsible for nearly half of Hasbro’s pre-taxed revenue by itself, due to the steady recent growth of both Magic and D&D.

Inside Wizards’ office in Renton, Wash. (GeekWire Photo/Kurt Schlosser)

Alta Fox also draws a straight line between Hasbro’s adherence to its “Brand Blueprint” growth model and recent controversial moves within the Magic community, such as the ongoing chaos within Magic‘s esports scene and pro leagues.

“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,” Haley writes. “If WOTC was separated in a tax-free spin-off with proper disclosures [which would mean it wouldn’t be required to adhere to Hasbro’s “Brand Blueprint” strategy]we believe it would trade at more than 20x EBITDA, or more than $100 per share, unlocking approximately 100% upside for Hasbro shareholders.”

Alta Fox’s proposed path forward also includes the appointment of five new nominees with gaming experience to Hasbro’s board of directors, and a new, transparent capital allocation policy at Wizards. That policy would “prioritize reinvestment in core franchises such as Magic: The Gathering and Dungeons & Dragons,” while “reducing speculative bets on non-core video game franchises in hyper-competitive categories.”

Presumably, if implemented, this would mean an end to Wizards’s recent big moves into video game publishing and development, in favor of doubling down on both D&D and Magic‘s current core hustles. As a side note, the Free the Wizards website also lists last year’s D&D video game Dark Alliance as an example of an “inability to demonstrate success.”

To some extent, Alta Fox appears to be choosing its window here, as all five of its proposed nominees are reportedly “particularly eager to provide insight and support to new Chief Executive Officer Chris Cocks.” If you were ever going to bring in a new guard at a decades-old company like Hasbro, the week before a new CEO takes office is a decent time to do it.

Alta Fox is careful to note that under the terms of its plan, it would not seek “draconian initiatives” such as management shifts or layoffs. Its campaign “is simply about restoring accountability and proper incentives, refocusing on beloved brands and reigniting sustainable growth.”

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