Mattel is offering C$17.75 ($16) a share, according to a statement today, a 36 percent premium over yesterday’s closing price. The board of Montreal-based Mega Brands unanimously approved the transaction, and investors holding 39 percent of the stock, including Chief Executive Officer Marc Bertrand and Fairfax Financial Holdings Ltd. (FFH), agreed to the deal.
The purchase of Mega Brands, the world’s second-largest maker of snap-together blocks, will fill a product hole for Mattel. It doesn’t have its own construction line, locking it out of a $4 billion market in the U.S. and Europe. The category also is a bright spot in a toy industry that has seen growth stall in the U.S.
Mattel considered starting its own construction line, then opted instead to buy Mega Brands because it would be faster and less risky, Mattel CEO Bryan G. Stockton said on a call with reporters. Mattel got its first taste of construction in 2012 when it debuted blocks for its Barbie brand through a licensing deal with Mega Brands. Mattel realized that replicating this kind of expertise would take years, Stockton said.
“This acquisition is all about growth,” Stockton said. “We see an opportunity to expand our brands in this category across boys, girls and preschool.”
Mattel shares rose 0.4 percent to $37.31 at the close in New York. They have declined 8.4 percent over the past year. Shares of Montreal-based Mega Brands surged 36 percent to C$17.72 today in Toronto.
Mattel is coming off a lackluster holiday season, with sales sinking 6.3 percent -- the biggest quarterly drop since 2009. The El Segundo, California-based toymaker has looked to acquisitions to boost sales in the past. In February of 2012, it paid $680 million to buy HIT Entertainment Ltd., owner of Thomas the Tank Engine. It also acquired Fisher-Price Inc. for $1.1 billion in 1993, Tyco Toys Inc. for $755 million in 1996 and American Girl LLC for $700 million in 1998.
Hasbro Inc. (HAS) -- the world’s third-largest toymaker, after Mattel and Lego -- has shied away from making large acquisitions to enter categories. It started its own building brand, KRE-O, in 2011. Megabrands’ Mega Bloks is more established, though that company’s sales are still about a 10th the level of Lego’s.
Today’s deal should close next quarter. It’s expected to reduce this year’s earnings because Mega Brands has lower gross margins, Mattel said. After that, the transaction should add to profit as Mattel uses its distribution and manufacturing scale to reduce costs and its marketing skill to drive sales, the company said.
“This rounds out their portfolio,” said Sean McGowan, an analyst at Needham & Co. in New York. Mattel will be able to expand the brand quickly by moving it into countries where Mega Bloks aren’t currently sold, he said. Mega Brands is only in about half of Mattel’s markets.
Mattel will continue to look for acquisitions in toy categories where it doesn’t have much of a presence, the company said.
Fairfax, the Toronto-based holding company run by CEO Prem Watsa, is Mega Brands’ largest shareholder, with a 19 percent stake, according to data compiled by Bloomberg. Fairfax bought into the company in 2008, purchasing C$64 million in convertible debentures as part of the toymaker’s recapitalization plan.
Fairfax, also the biggest shareholder of smartphone maker BlackBerry Ltd., acquired 65 million shares in 2010. Mega Brands stock had dropped about 75 percent since the closing of the debentures purchase. At its peak in December 2005, Mega Brands was worth C$552.40 a share. The company was forced into a major recall and paid a penalty in the U.S. after children swallowed magnets that detached from its toys.
Bertrand, the CEO, will serve as an adviser for a year and Mega Brands’ headquarters will stay in Montreal, Mattel said.
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