After spending decades struggling to be a Really Useful Engine on the Island of Sodor, Thomas the Tank Engine is now facing an especially daunting uphill task.
Montreal-based Mega Brands Inc. is hoping the popular children's train will also help rebuild its declining sales after two years of steep losses and recent questions about the company's financial viability.
The toy maker announced yesterday it has signed a global licensing agreement with HIT Entertainment to develop construction-block toys based on the Thomas the Tank Engine television series, which is a globally syndicated hit show among the preschool set. The deal means the Thomas construction licence currently held by competitor Lego AS "will be transitioning" to Mega Brands, HIT Entertainment said yesterday.
Mega Brands revealed no financial details about the agreement, but said its first products will hit the shelves next spring in conjunction with the 65th anniversary of the first publication of the Thomas series of children's books, which later spawned a sprawling line of wooden trains. The launch will come as HIT Entertainment also unveils new computer-generated episodes of its Thomas television series, giving the series a new look in 2010. "It's a very significant deal for us," said Mega Brands vice-president Harold Chizick. "It quickly becomes one of the cornerstones in our franchise, and this will continue to strengthen our position as a leader in pre-school construction."
The announcement sent the company's shares soaring 82 per cent on the Toronto Stock Exchange yesterday, closing at 70 cents, up 32 cents.
Mega Brands needs to hitch its engine to a hit show after revealing a loss of $458-million last year on top of a $97-million loss in 2007 following a disastrous product recall of magnet-based toys after one child died and 27 were injured when they swallowed magnets.
The company has more recently been dogged by questions about its financial viability, and one of its most active analysts, Benoit Caron of National Bank Financial, dropped coverage of the company in April after warning it may face a "liquidity crunch."
Toy analyst Lutz Muller of U.S.-based toy and video game consultants Klosters Trading Corp. said yesterday the Thomas brand is not likely strong enough to single-handedly rescue Mega Brands this year, but said it should boost sales once the products hit store shelves.
"It's not a strong enough licence to get a financial institution to give you significant amounts of money," he said. "If it was Star Wars or the Harry Potter license, that's a different issue, because these are really money spinners ... But if they make it into next year, Thomas the Tank will help them, I think."
Mr. Muller said the challenge for Mega Brands will be to fully capitalize on the licence opportunity.
He said the company has the licences to develop products based on a number of other popular pre-school television shows (including In the Night Garden and The Wonder Pets!) but has not yet begun selling any toys from those licences.
Mr. Muller also argues Mega Brands has not taken full advantage on former licences it held in the past for brands such as Transformers.
But Rick Glankler, senior vice-president of global brand management for HIT Entertainment, said his firm is confident Mega Brands will develop "unique" concepts for Thomas, which he called the world's leading licensed brand for preschool boys.
"It's not just the vehicles, it will be destinations, train stations, engine depots, you name it that helps them recreate all the stories they're seeing," Mr. Glankler said.