California headquartered toy company Mattel, Inc.  and Montreal-based MEGA Brands Inc.  have announced a definitive agreement for Mattel’s acquisition, through a wholly-owned subsidiary of Mattel, Inc., of MEGA Brands for US$460 million. The acquisition advances Mattel’s global growth strategy of building upon its world-class portfolio of brands by expanding into two of the fastest-growing toy categories. MEGA Brands, a family of leading global brands, is the No. 2 player in the $4-billion construction building sets category with its MEGA BLOKS brand as well as a competitor in the $2-billion arts & crafts category.
“A key pillar of our global growth strategy is the strategic acquisition of brands that will both benefit from our scale and help extend our reach into new and growing categories,” said Bryan G. Stockton, Mattel Chairman and CEO. “The construction play pattern is popular, universal and has had one of the fastest growth rates over the past three years. We look forward to helping MEGA Brands accelerate its global growth, providing more choices for more children and their families.”
Mattel’s world-class portfolio of brands will complement MEGA Brands flagship MEGA BLOKS® and existing licensed brands, such as HALO®, Skylanders®, Call of Duty®, Assassin’s Creed®, Power Rangers®, Hello Kitty®, SpongeBob SquarePants® and others. The acquisition will give Mattel the opportunity to broaden its relationship with its entertainment partners.
The acquisition also creates the opportunity to grow the MEGA Brands sizable arts & crafts business, with brands including Rose Art® and Board Dudes®. Arts & crafts activities are highly popular among children of all age groups, and the global category provides growth opportunities for Mattel with its core brands and entertainment and licensing partners.
“MEGA Brands has built leading positions in large, growing categories by providing engaging creative experiences for children and families through innovative, well-designed and high-quality products, and Mattel is the ideal partner to take our brands to the next level,” said Marc Bertrand, MEGA Brands President and CEO. “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.”
MEGA Brands has estimated net sales for FY 2013 of US$405 million. It ranks among the top 15 toy companies globally in terms of sales, according to statistics published by the NPD in 2013. In 2013, it achieved record sales of preschool construction toys.
Founded and based in Montreal, MEGA Brands has approximately 1,700 employees in 17 countries. Mattel plans to maintain MEGA Brands expertise in manufacturing, both in Montreal and Tennessee, and plans to maintain the MEGA Brands headquarters in Montreal and will seek to tap into MEGA Brands proven skills in design and development in the construction and arts & crafts categories.
“At Mattel, we have followed a consistent philosophy on acquisitions – we seek to create value by building on the foundations of the great businesses we have acquired while retaining and nurturing the core values, talents and unique capabilities that made them great,” Stockton said. “We will approach our new brands and colleagues at MEGA Brands with great respect for what they have built and enthusiasm for what we can build together.”
The agreement provides for the acquisition of MEGA Brands for C$17.75 per common share and includes the acquisition of all of the outstanding common shares and warrants of MEGA Brands. This represents a premium of 32% to the 30-day volume-weighted average price of MEGA Brands common shares on the TSX as of February 26, 2014. Mattel plans to fund the acquisition through a combination of new debt and cash on hand.
The purchase price above represents net consideration of C$7.81 per 20 warrants. Warrant holders may acquire one common share of MEGA Brands in exchange for every 20 warrants at an exercise price of C$9.94 per common share. The warrants expire on March 30, 2015.
The Board of Directors of MEGA Brands has unanimously approved the transaction and recommends that MEGA Brands common shareholders approve it. The financial advisor to the Board of MEGA Brands has provided an opinion that the consideration proposed to be paid to MEGA Brands common shareholders is fair from a financial point of view.
Each of Fairfax, Victor Joseph Bertrand, Marc Bertrand and Vic Bertrand, who together hold approximately 39% of the outstanding common shares of MEGA Brands, have entered into voting support agreements and agreed to vote their common shares in favor of the arrangement.
The arrangement agreement provides that MEGA Brands is subject to non-solicitation provisions and provides that the Board of Directors of MEGA Brands may, under certain circumstances, terminate the agreement in favor of an unsolicited superior proposal, subject to payment of a termination fee of US$12 million to Mattel and subject to a right of Mattel to match the superior proposal in question.
In connection with the closing of the arrangement, MEGA Brands intends to refinance and, thereafter, redeem all of its outstanding 10% senior secured debentures due March 30, 2015, at a redemption price equal to 105% of the principal amount of the debentures, plus accrued and unpaid interest, pursuant to the terms of the debenture indenture.
The terms and conditions of the arrangement will be summarized in MEGA Brands management information and proxy circular, which will be filed and mailed to MEGA Brands shareholders in March 2014.
Advisors and Legal Counsel
RBC Capital Markets is acting as financial advisor, Latham & Watkins LLP is acting as legal advisor and McCarthy Tetrault LLP is acting as Canadian legal advisor to Mattel. Rothschild is acting as financial advisor and Osler, Hoskin & Harcourt LLP is acting as legal advisor to MEGA Brands.
Live Webcast – Mattel
In conjunction with the announcement, Mattel will webcast a Securities Analyst and Investor conference call at 8 a.m. Eastern time today. The conference call will be webcast on the “Investors” section of Mattel’s corporate website . To listen to the live call, log on to the Web site at least 15 minutes early to register, download and install any necessary audio software.
An archive of the webcast will be available on Mattel’s website for the next 90 days and may be accessed beginning two hours after the completion of the live call. A telephonic replay of the call will be available beginning at 11 a.m. Eastern time on February 28 until March 7 at midnight Eastern time and may be accessed by dialing 404.537.3406. The passcode is 6286841.
 Construction building sets category is a ~$4 billion category in mature markets in the U.S. and Europe and growing in emerging and developing markets. Source: NPD
 Arts & crafts category is ~$2 billion in mature markets in the U.S. and Europe. Source: NPD