Bulls Make Money, Bears Make Money, Peppa Pig Gets Slaughtered.
Bulls Make Money, Bears Make Money, Peppa Pig Gets Slaughtered.
Curiously Well-Timed Insider Transactions at Entertainment One
Welcome to the Nongaap Newsletter! I’m Mike, an ex-activist investor, who writes about tech, corporate governance, the power & friction of incentives, strategy, board dynamics, and the occasional activist fight.
If you’re reading this but haven’t subscribed, I hope you consider joining me on this journey.
Curiously Well-Timed Insider Transactions
Welcome and thanks for joining my newsletter!
Let’s kick things off with a scoop and investigate curiously well-timed stock transactions by insiders at Entertainment One (eOne) during acquisition talks with Hasbro, Inc.
Note: Hasbro is on track to acquire eOne for $4 billion (31% premium).
TLDR Summary
In early May 2019, Hasbro CEO & Chair Brian Goldner contacted eOne’s CEO Darren Throop regarding Hasbro’s interest in exploring a potential strategic transaction involving Hasbro and eOne.
On 15 May 2019, following consultation and discussions between Mr. Throop and Mr. Allan Leighton, the Chairman of the Board, regarding Mr. Throop’s meeting with Mr. Goldner, eOne entered into a confidentiality and standstill agreement with Hasbro in order to facilitate further meetings and discussions.
Despite signing a confidentiality & standstill agreement with Hasbro to explore a strategic transaction, Directors Robert McFarlane and Michael Friisdahl would acquire shares in subsequent weeks. It is not clear if the Directors were aware of the agreement and why eOne would clear them to acquire shares.
eOne CEO Mr. Throop would also receive stock options following the execution of the Hasbro confidentiality & standstill agreement and it is not clear if the Remuneration Committee was aware an agreement was in place.
Hasbro and eOne would eventually announce a deal where shareholders would receive £5.60 in cash for each common share of eOne, which represents a 31% premium to eOne’s 30-day volume weighted average price (VWAP) as of August 22, 2019.
But First, A Little Background…
Those who follow me on Twitter know I enjoy critiquing executive compensation and insider transactions.
Much can be learned about a Company’s culture, its values, and priorities by studying these transactions. Subtle changes in equity grants and incentives can also serve as a canary to shifting insider thinking and sentiment.
And yes, you can generate meaningful stock returns following this stuff.
Note: I don’t endorse YOLO options trading strategies.
With that in mind, insider transactions can’t be looked at in a vacuum. Context is required, and to better understand the eOne acquisition it helps to take a quick look at the magic of content IP.
The Magic of Content IP
Note: Trying to keep this abbreviated but I could probably write a ton on content IP.
Creating original, high-demand content is hard. Really hard. It’s one of the primary bottlenecks in the stream wars and spending billions on content is table stakes to attract, retain, and grow subs.
You’d think owning high-demand, content IP is a road-to-riches, but it’s not that straightforward. Valuing content is hard. It’s contingent on:
Consumer tastes and loyalty
Quality storytelling and creative leadership
Monetization channels (OTT subs, toys, comics, video games, movies, etc.)
I would say most content is valued on 1 or 2 factors, but there’s material upside if you nail all 3...cough…Disney…cough. On the flip side, miss on all 3 factors and bankruptcy is on the table.
These are the dynamics content executives are constantly wrestling with when determining near & long-term strategy, go-to market, spending priorities, strategic alternatives, etc. One day, you’re turning down a $40 per share acquisition offer because it’s too low. The next, you’re exploring strategic alternatives and a $9 stock.
Which brings us back to Hasbro and why they want to acquire eOne.
If you can combine a robust, money making machine (from film to gaming to toys) with a portfolio of high-demand content (from Transformers to Peppa Pig), magic happens. Hasbro is trying to capture magic by acquiring eOne.
Entertainment One Insider Transactions
Given my long-time interest in content IP and industry consolidation, a Twitter friend pinged me earlier this year (June 2019) about eOne and suggested I take a closer look. The stock was trading off of recent highs so I took a quick look.
A few things caught my attention, particularly the timing of insider transactions relative to the release of Company news:
January 22, 2019: CEO Darren Throop sells 1.5m shares for £3.86 per share
May 21, 2019: Full Year Fiscal March 2019 earnings announcement
May 23, 2019: Director Robert McFarlane buys 28,100 shares for £4.08 per share
June 5, 2019: Executive Mark Gordon in talks to leave eOne President post
June 7, 2019: Director Michael Friisdahl buys 14,444 shares for £4.06 per share
The transactions by Directors Robert McFarlane and Michael Friisdahl were really interesting and bullish to me for a few reasons:
Insider transaction rules for London Stock Exchange (LSE) listed companies is generally more restrictive than US exchanges. Directors are also typically required to get trade clearance from the Board’s Chairman before executing a transaction.
Given the restrictive LSE rules and clearance requirements, Directors need to go out of their way to acquire shares. I consider it a bullish sign if a Director is willing to put in the effort.
Entertainment One has no requirement for non-executive Directors to own shares. It’s a bullish sign to me if a Director voluntarily buys and owns shares when they’re not required to.
Robert McFarlane previously acquired 14,224 shares in May 2018 at £2.89 generating a nice return. He might have a good feel for value.
Michael Friisdahl is acquiring shares for the first time despite being a Director since November 2017. He might be excited about the Company’s prospects despite recent earnings and potential leadership changes.
Directors tend to be very well informed about major strategies (and changes) after attending fiscal year end Board meetings. It’s rare to make meaningful change in the middle of the fiscal year so I don’t weigh insider transactions as heavily in the middle of the year as I do for transactions that occur after annual earnings.
Directors were buying stock at prices that was at a premium to CEO selling in January 2019.
Bullish signals don’t mean the stock is going to be a winner, but they are useful “tells” when trying to understand the entire story. This particular story ends with the announcement that Hasbro would acquire eOne at £5.60 per share.
Background to the Acquisition
One of my favorite activities is to read the Background to the Acquisition in merger documents which describes the timing and conversations that brought the deal together. You can learn a lot about the industry, players, and dynamics reading the merger documents.
One thing I really enjoy doing is laying out key dates in the merger docs with general Company disclosures such as earnings, conferences, and insider transactions. Often times, the results are mundane and as-expected but sometimes you come across an interesting case. Entertainment One is one of those those interesting cases.
The merger timeline paints a much different picture of those inside transactions:
May 9, 2019: Hasbro CEO Mr. Goldner meets with eOne CEO Mr. Throop and expresses interest in exploring a potential transaction.
May 15, 2019: Following consultation and discussions between eOne CEO Mr. Throop and eOne Chairman Mr. Leighton regarding Mr. Throop’s meeting with Mr. Goldner, the Company entered into a confidentiality and standstill agreement with Hasbro.
May 21, 2019: eOne engages Osler and Mayer Brown as legal counsel and announces Full Year Fiscal March 2019 earnings.
May 23, 2019: Director Robert McFarlane buys 28,100 shares for £4.08 per share
June 4, 2019: eOne contacts J.P. Morgan to discuss a potential engagement regarding a potential strategic transaction and subsequently enters into a formal engagement letter with J.P. Morgan to serve as financial advisor.
June 7, 2019: Director Michael Friisdahl buys 14,444 shares for £4.06 per share
June 11, 2019: High level, preliminary financial due diligence progresses throughout May and June 2019 with senior management of Hasbro and eOne meeting June 11 to explore the merits of a potential strategic transaction.
Subsequent conversations, acquisition offers, and due diligence occur from July 2019 through August 2019 with a deal announced August 22, 2019
Those are some curiously well-timed inside transactions. The Company had a standstill agreement in place with Hasbro regarding a possible transaction and the Chairman of the Board was aware.
How could the Directors be allowed to buy stock under these circumstances?
For reference, Hasbro insiders appear to stop inside transactions on May 16, 2019 after a standstill agreement was entered with eOne on May 15, 2019.
So what happens next?
To the Penalty Box for Boarding
Yes, this tweet is in reference to Michael Friisdahl being President and CEO of Maple Leaf Sports & Entertainment, and me trying to make sense of what is going on with his curiously timed eOne stock purchase.
Someone on the Board probably needs to go into the Penalty Box for these transactions, but an investigation is needed to determine:
Did the Directors know a confidentiality agreement was in place with Hasbro to explore a strategic transaction?
Were these transactions the result of poor oversight by the Chairman?
When did the rest of the Board know Hasbro approached eOne regarding a strategic transaction?
If Directors were unaware of an agreement, when did the CEO and the Chairman have a duty to disclose Hasbro’s interest?
What’s interesting to me is this happened under the watch of CPPIB who has an eOne Board seat, owns 17% of eOne, and prides itself on corporate governance best practices.
This isn’t a criticism of CPPIB. It’s more an observation into how hard Board oversight can be. It will be interesting to see how they and the rest of the Board approach this issue (if they do).
Bulls Make Money, Bears Make Money, Peppa Pig Gets Slaughtered.
There’s an old Wall Street saying "Bulls make money, bears make money, pigs get slaughtered" that warns investors against excessive greed.
Pigs are investors whose goal is to make the most amount of money in the shortest amount of time. Piggish investors are known to either take on high degrees of risk or overlook risk in order to make a profit. They often make rash investment decisions and buy stocks without doing their proper due diligence. As a result, they tend to lose money, hence the adage that they inevitably get slaughtered. While bullish and bearish investors may have opposite investing styles, they each have the potential to make money if they manage to time the market correctly. Pigs, by contrast, are the most likely to lose money no matter the shape of the market because of their greedy attitude.
Entertainment One insiders generated a nice return selling Peppa Pig to Hasbro, but what will they lose in the process?
Bonus: Curious Case of Marvel and Disney
Another interesting thing to point out is Entertainment One’s CEO and CFO both received equity option grants on May 21, 2019 as part of their annual compensation package, shortly after the Company entered into a confidentiality & standstill agreement with Hasbro regarding a potential strategic transaction.
This isn’t the first Company I’ve seen this situation arise and I could probably write an entirely separate post on the topic of granting executives equity in the middle of M&A discussions, but the question remains:
Was the Remuneration Committee aware of the Hasbro agreement?
Did the CEO and Chairman sit on that information?
What’s interesting is the circumstances of these grants remind me of the Marvel acquisition by Disney 10 years ago when Marvel’s CEO received options prior to the Disney Deal.