colourful childs toys construction blocks

By Matt Townsend and Katia Dmitrieva

Mattel (MAT), the world's largest toymaker, agreed to buy Mega Brands (MB) for $460 million, acquiring the biggest challenger to Lego A/S in the construction-toy market.

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 (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.

'About Growth'

"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 0.8 percent to $37.44 at 10:34 a.m. in New York. They had declined 9 percent over the past year through yesterday. Shares of Montreal-based Mega Brands surged 36 percent to C$17.73 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, owner of Thomas the Tank Engine. It also acquired Fisher-Price for $1.1 billion in 1993, Tyco Toys for $755 million in 1996 and American Girl for $700 million in 1998.

Hasbro (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. Mega Brands' Mega Bloks is more established, though that company's sales are still about a 10th the level of Lego's.

Lower Margins

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 Investment

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 (BBRY), 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.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

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14 Comments

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quinncarpetclean

it's all about the tinker toys

March 02 2014 at 3:52 AM Report abuse rate up rate down Reply
iluvsugrray

Mega Blocks are awful. What a dumb business move.

March 02 2014 at 2:28 AM Report abuse +1 rate up rate down Reply
chachiwayne66

have a 15x15 lego city in the front room...39...let me design to get rid of the cheap no style mega block look so these will actually sell.

March 02 2014 at 1:40 AM Report abuse rate up rate down Reply
1 reply to chachiwayne66's comment
Richard

I have an entire room just for a LEGO layout, including railroad. I would never consider degrading my LEGOS with Mega Blocks.

March 02 2014 at 2:23 AM Report abuse +2 rate up rate down Reply
Brian Workman

Cheap purchase at twice the going price!?

March 02 2014 at 1:17 AM Report abuse rate up rate down Reply
mingthemercilessone

This is a sure-fire way to destroy whatever credibility this company had. Mattel bought Pleasant Company, the doll-maker who introduced American Girls and Bitty Baby to the American childhood rites of passage. The minute they bought it, they started phasing out the original "Girls" of various ethnicities. Now, they are predominantly blonde, light-eyed vapid little girls who aspire to be ballerinas and artists. Not ONE of their newest girls (or the Girl of the Year) has been a girl of color, or one whose interests lay in STEM--science, technology, engineering, and math.

So, look out, Lego...your closest competition is about to become Barbie pink, with accents of lavender, mint green, baby blue, and Easter yellow. YUCK.

March 02 2014 at 12:37 AM Report abuse rate up rate down Reply
2 replies to mingthemercilessone's comment
chachiwayne66

American dolls were made overseas before this...rather have a china American doll? and BTW lego just came with pink, with accents of lavender, mint green, baby blue, and Easter yellow. ...they are called lego friends sets.

March 02 2014 at 1:43 AM Report abuse +1 rate up rate down Reply
Doug Fordon

Hmmm, I have a few problems with your post. First, American girl still has many dolls of different ethnicities. Second, what's wrong with a little girl wanting to be a ballerina or a princess? Third, "stem-science" are you kidding? Young kids could care less about science, technology, engineering or math unless it involves video games or it's what mom and dad do for a living. What’s wrong with pastel Barbie’s, don’t you think they did market research to see what little girls want?

You are so desperate to remove old stereotypes that you can't imagine that some of them might be accurate. Little boys do like trucks, swords and guns & little girls do like dresses, dolls, flowers and pink. I have no problem with a little boy that likes dolls or flowers but I will tell him that those are girl things so that society doesn't confuse him, but if he wants to play with them that’s fine too. Growing up is hard enough without rules and expectations.

March 03 2014 at 7:15 AM Report abuse rate up rate down Reply
Pope John

Never heard of Mega Bloks

March 01 2014 at 9:37 PM Report abuse +1 rate up rate down Reply
bronson9021

LET GO OF MY LEGO!!!!!

March 01 2014 at 5:38 PM Report abuse +2 rate up rate down Reply
dazedboy420

I doubt the toy company will go under..

March 01 2014 at 4:16 PM Report abuse rate up rate down Reply
krs

When I was young back in the 50's we had American Bricks. You could build some
pretty nice looking houses. They had the bricks plus doors, windows, roofd and gargage
doors.

March 01 2014 at 3:38 PM Report abuse rate up rate down Reply
5 replies to krs's comment
companyoflosers

the toy industry will probably go under here in the US with how popular electronic devices and games are becoming with kids. besides, when a tablet gets left out it doesnt clutter up an entire room and make it hard to walk around.

March 01 2014 at 2:04 PM Report abuse -1 rate up rate down Reply
1 reply to companyoflosers's comment
Doug Fordon

I couldn't disagree more. But I guess it all depends on what age we're talking about. Giving a kid under 4 a tablet just isn't a good idea. First, they will most likely break it. It will wind up on the floor stepped on. Second, you will spend every waking moment changing apps or hitting OK buttons because they can't read yet. Third, charging and batteries. Fourth, there is no real imagination in electronics and young kids get bored. My 2 and 4 year old grandsons love their Lego's, toy guns/swords and Tonka trucks. They would much rather have me play with them then to sit by themselves on a tablet.

Now older kids or teenagers, that’s another story. But they weren't playing with Lego's anyway.

March 03 2014 at 7:26 AM Report abuse rate up rate down Reply