A French commercial court has placed the country's top toymaker Smoby-Majorette SA into receivership, despite the firm's acquisition in May by U.S. consumer entertainment goods group MGA Entertainment Inc.
The court, in Lons-le-Saunier, rejected an Oct. 9 rescue plan presented by MGA, a Van Nuys, Calif., company that also owns rotational molder Little Tikes Co.
Smoby has accumulated debt of 277 million euros ($393 million).
The ruling means other potential buyers may now bid for Smoby, which is Europe's second-largest toymaker.
MGA's French lawyers called the court's decision ``a real nightmare.'' They claim the move into receivership was unjustified and will have shaken confidence being built up by MGA's support for Smoby amongst its employees and suppliers.
A day after the ruling, MGA was considering its options. These include simply appealing the decision or, as Smoby's majority shareholder, presenting a similar recovery plan for the business, or bidding to buy just its profitable assets, according to French lawyer Jason Reeve of MGA's law firm Poulain & Associes in Paris.
The French toymaker, formed in 1924 and formerly family-run, has 18 subsidiaries, with plants in Spain, France, Italy, Romania and China, and distribution in 90 countries. Its main products include Smoby play furniture and doll accessories; Majorette and Solido die-cast vehicles; Ecoiffier construction sets and Berchet early-development toys.
It has struggled to regain profitability since it acquired its smaller French rival, Groupe Berchet, in 2005.
Smoby of Lavans-les-Saint-Claude, France, entered the French equivalent of Chapter 11 bankruptcy protection in April after filing for bankruptcy in March. It was then purchased for a token 1 euro ($1.42) by MGA, the manufacturer of toy brands including Bratz fashion dolls and Little Tikes toddlers' toys.
Under safeguard creditor protection procedure, MGA undertook to provide the ailing toymaker with working capital to enable it to continue operating. Earlier in the year, MGA provided a 29 million euro ($41 million) line of credit. Between June and August, MGA made available to the toymaker a 12.5 million euro ($17.7 million), interest-free cash loan, Reeve said in a telephone interview from Paris.
But a later shortfall in funding meant Smoby came close to failing to make the required cash payments to suppliers, some of whom began to suspend their deliveries. In September, MGA promised the court it would pay an additional sum of nearly 12 million euros ($17 million) into the Smoby fund, which it did on Oct. 3, according to Reeve. That will enable the toymaker to supply the market through the end of 2007, he added.
Now, however, the court in Lons-le-Saunier has rejected MGA's rescue plan.
``The court ruling is very bad news for MGA,'' said Reeve, who conceded the decision may have been a sanction against MGA for late payment of funds to Smoby. But, under French law, a company can only be taken into receivership if it is insolvent and unable to pay its debts, and Smoby had around 20 million euros ($28 million) in its accounts at the time, he said.
He said the court move against his client was ``very political'' with the hand of France's finance ministry clearly visible in the public prosecutor's intervention.
Earlier, as part of its French recovery plan, MGA put two noncore loss-making Smoby operations into receivership in July. They are the toymaker's plastics product development company, Smoby Engineering, and packaging blow molder, MOB Emballages SAS, both of Moirans-en-Montagne, France.
Reeve said MGA will decide on its next move by Oct. 15. Potential new bidders for Smoby now have until March to submit their plans, and the court then has to select the best offer.
MGA already has a partner in Europe since it signed joint venture deals a year ago with doll maker Zapf Creation AG of RÃ¶dental, Germany. MGA, which holds a 20 percent stake in Zapf, formed a 10-year joint sales venture allowing MGA to use Zapf sales channels in Europe, and allowing Zapf to sell its products exclusively through MGA in North and South America.
A similar deal between the two companies gives MGA responsibility for Zapf's Asian suppliers and product development. Zapf transferred its Hong Kong subsidiary activities to MGA, but has kept product design in Germany. The deal is designed to cut Zapf's cost base considerably.