March 11 (Bloomberg) -- Tomy Co., the Japanese maker of Transformers and Pokemon toys, agreed to buy RC2 Corp. for $640 million to add Thomas the Tank Engine products in North America as a declining birth rate erodes demand at home.
The offer is valued at $27.90 a share in cash, 27 percent more than the March 9 closing price, Oak Brook, Illinois-based RC2 and Tokyo-based Tomy said yesterday in a statement.
Tomy is targeting overseas acquisitions to revive growth as falling birth rates in Japan, which contributed to two straight annual declines in revenue, crimps demand for new toys. The offer is priced at 10.5 times estimated earnings before interest, tax, depreciation and amortization, compared with a median multiple of 10.6 for Japanese acquisitions of overseas companies in the past 12 months, according to data compiled by Bloomberg.
“The price for RC2 seems a little high when you consider the future of the toy market,” said Takao Suzuki, an analyst at Toward the Infinite World Inc. in Tokyo with a “neutral plus” rating on the shares. “M&A is the right strategy. The domestic toy market won’t grow because there are fewer children.”
Japan’s population is shrinking from a peak of 127.8 million in December 2004, according to the nation’s Statistics Bureau. The proportion of the population ages 0-14 decreased to an estimated 13 percent last year from 14.6 percent a decade earlier and may fall to 10.8 percent by 2020, according to the agency.
Tomy rose 1.3 percent to 698 yen as of 12:30 p.m. in Tokyo trading. RC2 stock surged 16 percent to $25.51 yesterday in Nasdaq Stock Market trading.
Japanese companies are stepping up acquisitions overseas after the yen strengthened to a 15-year high against the dollar last year. The currency traded at 82.80 against the dollar as of 12:49 p.m. in Tokyo.
The acquisition of RC2 would be the largest of a toymaker since the Carlyle Group agreed to buy a majority stake in Oriental Trading Co. from Brentwood Associates in June 2006 for $1.1 billion, according to Bloomberg data.
“This merger further enables Tomy to move towards our goal of increasing our global profile adding significant additional business in North America and Europe,” President Kantaro Tomiyama said in the statement.
Tomy is being advised by Bank of America Corp.’s Merrill Lynch unit while Robert W. Baird & Co. is advising RC2.
In addition to Thomas, RC2 makes products under the Learning Curve, Johnny Lightning and Ertl brands.
The Thomas character, who lives on the fictional island of Sodor, was created as part a series of children’s books by Wilbert Awdry in the 1940s. The character was later used for toys and a television series narrated by former Beatle Ringo Starr.
Apax Partners LLP owns the Thomas the Tank Engine brand through its HIT Entertainment Ltd., which it acquired in 2005 for 489.4 million pounds ($787 million). The brand is licensed in specific markets to companies including Tomy and RC2.
Haim Saban and former Walt Disney Co. Chief Executive Officer Michael Eisner are among parties considering bids for HIT, people with knowledge of the situation said last month.
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