* Deal to expand Mattel's construction, arts and crafts toys
* Offers C$17.75 per Mega Brands share, premium of 36 pct
* Shareholders holding 39 pct of Mega Brands support deal
* No rival offer expected - analyst
* Mattel shares up 0.5 pct
By Maria Ajit Thomas
Feb 28 Mattel Inc, the world's No. 1
toymaker, offered to buy Canada's Mega Brands Inc for
about $460 million to better compete with Denmark's Lego, the
leader in the fast-growing market for building blocks.
For the past three years, the demand for construction toys,
especially Lego's colorful building blocks, has been growing at
the expense of action figures and preschool toys - the forte of
Mattel and its main rival Hasbro Inc.
That pushed Lego's sales up 10 percent in a sluggish global
toy market in 2013, helping it overtake Hasbro to become the No.
2 toy company by sales globally. Mattel's sales rose 1 percent
and Hasbro's were flat in 2013.
Mega Brands, founded in 1967, sells building blocks that
directly compete with Lego, and will help Mattel garner a larger
share of a market that Chief Executive Bryan Stockton said had
some of the highest margins in the toy industry.
"Mattel currently has less than a 1 percent share in the
category. This is the single largest toy category where Mattel
does not play," Mattel's Stockton said on a call with analysts.
Mega Brands, which sells construction blocks under the MEGA
Bloks brand, estimated it has a 10 percent market share
Shares of Mattel, known for its Barbie and Hot Wheels
brands, were slightly higher at $37.13 on the Nasdaq.
The company offered C$17.75 per share of Mega Brands,
representing a premium of 36 percent to the stock's close on
Mega Brands' stock hit a high of C$17.89 in early trading on
the Toronto Stock Exchange, indicating some investors were
expecting a higher offer.
However, analysts said there was minimal chance of a rival
offer for Montreal-based Mega Brands, which has long been viewed
by some as a viable acquisition target for Mattel.
"While the possibility of another offer exists, particularly
in a toy industry dominated by giants, we feel it is unlikely,"
National Bank Financial analysts led by Leon Aghazarian wrote in
a note to clients.
Mattel's stock has fallen about 9 percent in the past 12
months. The stock trades at 13.86 times forward earnings, while
Mega Brands' shares trade at 9.44 times.
BATMAN VS BARBIE
Mega Brands also sells construction sets under licensed
brands such as HALO, Hello Kitty, SpongeBob SquarePants and
Mattel's Barbie and Hot Wheels. Lego offers toy sets based on
Star Wars, the Simpsons and DC comic characters such as Batman.
The deal will also help Mattel expand its arts and crafts
offerings with the addition of Mega Brands' Rose Art collection.
Sales of building sets as well as arts and craft toys
increased in the United States in 2013, amidst a 1 percent fall
in overall toy sales, according to market research firm NPD
Group. The fall was driven by declines in sales of action
figures and preschool toys.
Both Mattel and Hasbro posted lower-than-expected results in
the holiday selling season, when toymakers typically make about
40 percent of their annual revenue.
Mega Brands estimated net sales of $405 million in 2013.
Mattel said it expects the deal to hurt earnings in 2014, before
adding to profit next year.
Mattel said shareholders holding 39 percent of Mega Brands,
comprising Fairfax Financial Holdings Ltd and the company's
founding family, have agreed to vote in favor of the deal.
Fairfax, run by Prem Watsa, is Mega Brands' largest
shareholder with a stake of 27.4 percent as of Dec. 31.
Mega Brands will pay Mattel a termination fee of $12 million
if it accepts an unsolicited proposal, subject to Mattel's right
to match the proposal, the companies said in a joint statement.
Mattel said it plans to fund the acquisition through a
combination of new debt and cash. The deal is expected to close
in the second quarter.
RBC Capital Markets is acting as financial adviser to
Mattel, while Latham & Watkins LLP is acting as legal adviser
and McCarthy Tetrault LLP as Canadian legal adviser.
Rothschild is acting as financial adviser and Osler, Hoskin
& Harcourt LLP is acting as legal adviser to MEGA Brands.