Construction toy producer Mega Bloks Inc. is diversifying from its plastics-intensive core business with the acquisition of Rose Art group of Livingston, N.J.
Mega Bloks is best known for its rectangular plastic blocks, which have been challenging Lego Inc.'s dominance in the market for such toys. Rose Art also has a construction toy line, its Magnetix construction sets, but most of its lineup is geared to arts and crafts, games and puzzles.
Unlike Mega Bloks, Rose Art's cost structure is not much exposed to the ups and downs of resin pricing, the two companies' officials said in a conference call with analysts. Rose Art is most exposed to paper and ink costs among the materials it uses. Mega Bloks, by contrast, can point to resin costs for 15 percent of its cost of goods sold.
Both companies rely on offshore molding to contain costs. Mega Bloks does a lot of molding at its Montreal headquarters, but most of its non-North American sales are supplied from contract molding shops in China. Rose Art sources about half its production at several sites in the United States and half from China.
The Rose Art deal, expected to be done by the middle of the third quarter, satisfies at least two criteria Mega Bloks specified in a spring public filing in which it outlined its growth strategy. Rose Art's products complement Mega Bloks' line, especially in that they attract more interest from girls than the Mega Bloks. As well, the Rose Art product line strengthens Mega Bloks' relationships with retailers, giving it more shelf space
``Rose Art operates in growing, evergreen and basic categories, some of which are counter-seasonal to our current business,'' added Mega Bloks President and Chief Executive Officer Marc Bertrand in a news release.
Rose Art will gain from Mega Bloks' greater international exposure, said Rose Art President and CEO Larry Rosen. Last year, international sales accounted for about 10 percent of Rose Art's total, compared with a 43 percent chunk for Mega Bloks.
Mega Bloks earlier this year said it will significantly expand sales in Europe, partly as a result of a German court overturning a previous principle that limited competition against Lego.
The firm said Rose Art is No. 2 in the US$1.8 billion arts and crafts category in the United States and the leader in magnetic building sets, which it claims is the fastest-growing segment of the construction category.
Mega Bloks agreed to pay about US$350 million for privately held Rose Art and its affiliates. Rose Art had sales of US$268.4 million for the year ended Dec. 31. Mega Bloks' sales for the year were US$234.6 million.