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Why Hasbro Wants to Merge With DreamWorks Animation

The film company would give the toy company a direct pipeline to kids as TV becomes a less reliable platform

The news that Hasbro is talking merger with DreamWorks Animation has some analysts scratching their heads. But the move is at least in part to help the giant toymaker connect with its increasingly elusive target audience¬† — kids and their parents.

“With TV getting more fractured, ratings are deteriorating not as a function of quality but as a function of competition,” media analyst Seth Willenson told TheWrap. “If you’re trying to break a property on television and you’re a toy company, you’re used to doing that through advertising. It’s getting tougher and more expensive.”

“It does make sense when you think about the tie-ups between DreamWorks being able to use the character and brand library that Hasbro has to make movies or TV shows, and Hasbro in being exclusive on consumer products and toys around [DWA] character franchises,” B. Riley & Co. analyst Eric Wold told TheWrap.

Hasbro may see partnering with DWA as merely the cost of keeping up with an audience that is increasingly fleeing television for digital platforms like DWA’s AwesomenessTV or Netflix, where DWA has a streaming deal.

“[Hasbro] knows they have to make sizable investments at times to be able to get product that they’re going to be able to use,” said Willenson. “Making the steps to invest in an entertainment company that gives you a stake in many different parts of the success of a property. Theoretically it makes sense.”

By working with DWA, the toy company may be able to avoid some of the regulatory issues involved with marketing to kids on television.

“You’re dealing with a very complex regulatory environment for toy companies and what they can do with television. And I don’t think that same regulatory environment applies to motion pictures or even digital.”

Hasbro already launched several of its brands into feature films including the “G.I. Joe” franchise ($272.7 million) “Ouija” ($44 million) and the “Transformers” franchise, which has brought in over $1 billion at the box office.

For DreamWorks the benefits are clear. The studio has struggled at the box office and taken write-downs on “Rise of the Guardians,” “Turbo” and “Mr. Peabody and Sherman.” Katzenberg unsuccessfully shopped the company to 21st Century Fox and Softbank and is looking to consumer products to mitigate the risk of film production which Katzenberg has said is no longer a growth business.

“Tough to know if Hasbro is a first choice or a last choice [for DreamWorks],” said Wold.

Still, it’s hard to see why Hasbro would need to merge with DWA simply to market their products or simplify deals for consumer products.

“It’s tough to see what value can be gained above and beyond the two companies working together through traditional license deals,” said Wold.

Many analysts are questioning Hasbro’s valuation of the company which places it at $35 a share. DWA’s previous talks with Softbank valued the company at $32 a share and the company is currently trading near $25 a share. Upon the news of the merger DWA stock shot up 20 percent to $27 per share. Hasbro stock dropped 2 percent on the news and is currently trading at $55 a share.

“We don’t see a plausible argument for why [Hasbro] would pay 41% of its current market capitalization for a company which, according to its CEO is facing serious challenges,” analyst Vasily Karasyov wrote in a note.¬†“Films profitability continues to decline and the ramp in consumer product revenue the bulls hoped for isn’t coming: the revenue stream is down 21% so far in 2014.”