Mattel buying Mega Bloks parent for $460 million

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Toy giant Mattel Inc. has decided to join the fast-growing toy construction block market through an acquisition of Mega Brands Inc.

The two companies have signed a definitive agreement that would have Mattel spend US$460 million for the Montreal-based company, known for its Mega Bloks plastic construction toys, the firms announced Feb. 28.

Mega Brands is the second largest player in the $4 billion per year construction building sets market in the United States and Europe, after Billund, Denmark-based Lego A/S, which decades ago essentially invented the plastic toy building block market. The Lego legacy has earned it a spot in the National Toy Hall of Fame in Rochester, N.Y.

“The construction play pattern is popular, universal and has had one of the fastest growth rates over the past three years,” noted Mattel Chairman and CEO Bryan Stockton in a news release. “A key pillar of our global growth strategy is the strategic acquisition of brands that will benefit from our scale and help extend our reach into new and growing categories.”

“We are confident Mattel’s scale and global platform spanning 150 markets — combined with the expertise of our people in the construction and arts & crafts categories — will create tremendous growth opportunities for our brands,” added Mega Brands President and CEO Marc Bertrand.

Mega Brands had sales of about US$405 million in 2013. Mega Bloks are its largest business — nearly 80 percent of sales — but the company also has a sizable arts and crafts business under Rose Art, Board Dudes and other brands. It employs about 1,700 in 17 countries.

Mattel, of El Segundo, Calif., reported a 1 percent sales climb in 2013 to $6.48 billion. International sales outperformed Mattel’s U.S.-derived revenue.

Lego has enjoyed surging popularity for its plastic blocks as its sales jumped 10 percent last year to US$4.6 billion.

Mattel said it plans to keep Mega Blok plants open in Montreal and Tennessee. Stockton said in a conference call that Mattel will expand the Montreal operations to take advantage of Mega Brands’ manufacturing expertise. The Louisburg, Tenn., plant makes wood pencils for Rose Art.

Mattel did not address the future of Mega Brands’ offshore production. Mega Bloks originally were mainly molded in China but Mega Brands has been bringing production to Montreal as it invests millions of dollars to add molding capacity there. Mattel “will seek to tap into Mega Brands’ proven skills in design and development in the construction and arts & crafts categories.”

In addition to more molding capacity in Montreal, Mega Brands has been investing in packaging machinery that more efficiently fills bags with the correct number, color and style of play components, making it easier for Montreal to compete with China’s factories.

As of last fall, Mega Brands was molding more than half of its toys in Montreal, where some 1,200 employees work in an 830,000-square-foot facility.

Mega Brands is in negotiations with the provincial Quebec government for as much as C$50 million (US$45 million) in assistance to further expand and modernize in Montreal, confirmed Mega Brands vice president of manufacturing Jean-Francois Albert in a phone interview.

“Mattel will sit down with us and the Quebec government to see what we can do together,” said Albert. “We plan to grow and become more internationally competitive.”

“We are really excited by Mattel’s agreement,” added Albert. “Usually when Mattel buys a company they keep operations mainly as they were.”

Although Montreal has been taking on more of Mega Brands’ toy production, China probably will continue playing a role, especially for figurines and hand-painted toys, Albert explained. Montreal is focusing on high-volume production with multi-cavity molds but the recent installation there of small-tonnage injection presses allow it to also do more short-run molding.

“With Mattel we also will have access to different factories around the world,” Albert predicted.

Lego produces its toys in Denmark, Hungary, Czech Republic, Mexico and China. About a year ago it announced plans to build its own plant in China to get full control of the production process in the fast-emerging Asian market. The new, 1.2-million square foot plant in Jiaxing will begin production in 2015 and should be fully operational by 2017.

Mattel’s per-share offer of C$17.75 (US$15.98) is a 32 percent premium to the weighted average price for the previous month on the TSX exchange. Mega Brands’ board has approved the offer and will encourage shareholders to agree to it. Mega Brands’ board could under certain circumstances tear up the Mattel agreement in favor of a better offer but the Montreal company would have to pay a US$12 million termination fee. Mega Brands will mail information on the agreement to shareholders in March 2014. Mattel expects to close the deal in the second quarter.

Mega Bloks’ competition with Lego goes far beyond the plastic bricks children take to so readily.

The Lego brand has spawned licensing deals for popular characters. Lego has built several theme parks around the world that are based on assemblies of millions of its bricks. More recently, The Lego Movie turned out to be a blockbuster financially and critically.

“The [Lego] property is finding a multimedia expression,” toy analyst Sean McGowan of Needham & Co. told the New York Times. Central figures in “The Lego Movie” will star in a video game. Lego is expanding its work with the Cartoon Network and Warner Bros. for greater exposure in TV, video games and online forums. It is involved with Lucasfilm on Star Wars themes and has expanded into Lego versions of Harry Pottter, Iron Man and Batman characters.

Mega Bloks too has forged ties with licensors to capitalize on the popularity of children’s characters. In this area Mattel has enormous presence it can leverage into launching new platforms for Mega Brands.

Mega Bloks Barbie sets include fashion figures, clothing accessories and themed playsets designed to attract girls loyal to the Barbie brand launched decades ago by Mattel. Other licensed brands Mega Brands is tied into include Halo, Skylander, SpongeBob SquarePants, Hot Wheels, Captain America and Power Rangers. Going beyond cartoon characters, Mega Brands’ World Builder construction sets have ties with the famous John Deere, Caterpillar, Jeep and NYPD brands.

Shareholders with about 39 percent of Mega Brands’ outstanding shares agreed to Mattel’s friendly takeover. Fairfax Financial Holdings Ltd. of Toronto and the Bertrand family, led by Mega Brands CEO Marc Bertrand, see a solid future for Mega Brands in the Mattel stable. The Bertrand family started the business in 1967 as Ritvik Toys, an importer. In 1985 the firm developed its Mega Bloks line.

Mega Brands’ potential future is a far cry from dark days several years ago. In the mid-2000s it was saddled with high debt and financial squabbles from the 2005 purchase of the Rose Art crafts business. It survived a major recall of magnetic toys blamed on choking incidents and a legal challenge by Lego over alleged trademark infringement of Lego’s interlocking brick system.

Drained by these events, Mega Brands recapitalized in 2010 to avoid bankruptcy. It expanded aggressively and signed licensing deals to bring several iconic brands into its play offerings. Its North American market share in construction toys grew to 10 percent, a far cry from Lego’s estimated 75 percent share but a good beachhead for Mattel to build on.

Mega Brands and Lego are big purchasers in the plastics industry. Mega Brands is well into a program to have more than 100 injection presses in Montreal. Lego installed hundreds of Arburg injection presses in Mexico in a recently completed expansion. Overall, Lego consumes more than 12 million pounds of plastics per year. About 70 percent of that is ABS for its bricks, but that composition could eventually change. The company is looking for a more sustainable resin for its bricks and could make a switch by 2030. Mega Brands uses ABS for the small Mega Bloks compatible with Lego blocks and high density polyethylene for its larger blocks aimed at toddlers.