Toy aisles to get more crowded after Mattel agrees to buy Mega Brands

MONTREAL – Toy shoppers could face more choices in coming years as a result of Mattel’s US$460-million friendly takeover of Canadian toymaker Mega Brands, the world’s second-largest maker of construction sets after Lego.

“I think, for consumers, you are going to see some nice, new, exciting product coming,” Mega Brands CEO Marc Bertrand said Friday.

Mattel, the world’s largest toymaker is expected to extend its extensive line of licences, which includes Barbie’s dolls and Hot Wheels cars, to Mega Brands construction sets and arts line, two of the fastest-growing toy segments.

The transaction announced Friday will mark the sale of Canada’s only publicly traded toy company, which was founded in 1967 and grew to become the leading maker of pre-school construction toys.

“There is no better partner for the future,” Bertrand said during a conference call.

He said the prospects of Mega Brands maintaining its mark are strong because Mattel has a history of giving its acquired brands “a high degree of independence.”

Fisher-Price, American Girl and Hit Entertainment remained in their base communities long after being acquired, he said.

Bryan Stockton, Mattel’s chairman and CEO, said it (Nasdaq:MAT) plans to keep the Mega Brands head office in Montreal and to invest in its manufacturing operations.

The company expects to make the plant more efficient and profitable, noting it was “one of the key reasons that we’re buying this great company.”

Maintaining the headquarters of Quebec companies has been a politically sticky subject of late, but Bertrand said he sees no regulatory reasons for the transaction not to close in the second quarter. While Mattel has not provided any written assurances that it will maintain the Montreal plant, Bertrand said he’s confident Mattel sees the enormous potential of the facility and its employees.

Analyst Gerrick Johnson of BMO Capital Markets said Mattel’s chief financial officer is a “master” at finding cost savings and will find ways for Mega to become more efficient.

“I have a feeling that once he gets a closer look at stuff in Montreal he’ll be able to find a lot of cost savings over there as well,” he said from New York City, noting that staff downsizing has been part of cost-saving efforts in the past.

Stockton said Mattel will be able to contribute a more extensive distribution reach outside of North America, where Mega Brands has most of its sales, and plans to spend more on marketing than the smaller company has done in the past.

Bertrand and his brother Vic, who is chief innovation officer, will remain as advisers for at least a year.

Mattel is offering C$17.75 cash per share for Mega Brands and has the support of shareholders with 39 per cent of Mega Brands stock, including the founding Bertrand family and Fairfax Financial (TSX:FFH), which invested in the company as it struggled to survive disastrous recalls of its magnetic toy. Together, they would realize nearly $100 million of gross proceeds, excluding the purchase of warrants.

Approval of two-thirds of Mega Brands (TSE:MB) shareholders is required at a vote, expected to be held in about two months.

Bertrand said the deal flowed from its licensing arrangement with Mattel that began about a year ago. He said an expected weakness in fourth-quarter results, which will be announced next week, didn’t influence the timing of the transaction. Mega Brands has about US$400 million in annual sales and about $60 million in debt.

The cash portion of the offer is about 35 per cent above the recent market price for Mega Brand shares, which closed Thursday at $13.07 on the Toronto Stock Exchange. The stock surged to close at $17.72 in Friday trading, while Mattel shares gained 16 cents to $37.31 on the Nasdaq market

Stockton said the deal allows Mattel to fill its one weakness by immediately becoming a large player in the growing US$4-billion a year construction category, which is dominated by Mega Brands and Lego. Mega has about 10 per cent of the market.

Chris Byrne, a New York-based toy analyst known as The Toy Guy, said Mattel will gain some traction in the construction toy aisle but “it’s not going to supplant Lego.”

“I think it’s a very big win for Mattel. It’s not that Mega is any kind of slouch in terms of global presence but it can kick it up a bit.”

“There’s a lot of cross pollination that can go on there,” added Johnson, the BMO analyst, who said the product line will evolve over the next couple of years to challenge Lego as well as arts and crafts rivals like Crayola.

Johnson described the purchase price as fair and said he’s doesn’t foresee other bidders, including Hasbro which was rumoured to have been close to a deal several years ago in the midst of Mega Brands turmoil that nearly sent it into bankruptcy.

The sale would end a nearly 50-year run for Mega Brands, founded by Victor Bertrand and his wife Rita as Ritvik Toys, which originally sold toys in Canada that were manufactured elsewhere. By the early 1980s, it controlled a leading market share in Canada for plastic injection moulded toys.

The company made its big break in 1985 when it challenged Lego by selling its own line of Mega Bloks construction toys. It went public in 2002 after years of strong growth.

Marc Bertrand said the family carefully considered the company’s sale but felt it was in the best interests of shareholders and employees.

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