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Mega Brands shows pain of recaps Add to ...

Toy maker Mega Brands finally cured a nasty hangover from the easy credit days, by only by swallowing a massive dilution of its existing owners.

Mega Brands is paying off debt accumulated in part to pay for an ill-fated acquisition by hosing out new equity. We'll get to the details in a moment, but let's start with the bottom line for shareholders. When all is said and done, current owners of 100 per cent of this business will have just a 6.6 per cent stake on a fully-diluted basis. That is a dreadful price to pay for financial stability.

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The last 18 months have seen far too many of these recapitalization transactions, and a few filings for creditor protection, as corporations deal with the aftermath of era that featured cheap, easy access to loans.

Equity and debt markets bounced back last year, and that skated a great many companies back on side with lenders. But the pounding taken by Mega Brands shareholders shows there are still restructurings that need to play out to get companies back on their feet.

The alternative to these recap transactions is typically a filing for creditor protection, which tend to leave nothing for equity investors. So at Mega Brands, and other companies that go this route, the choice for shareholders tends to be between owning a little bit of something, post restructuring, and a whole lot of nothing, after a bankruptcy filling.



Mega Brands used a series of financings to pay down $300-million of borrowing, a purge that leaves the company with $131-million of debt.

The company raised $100-million in a bought deal led by GMP Securities. This share-plus-warrant financing features a warrant that allows buyers to purchase an additional Mega Brands share for 50 cents over the next five years. The day before the recapitalization was announced, Mega brands shares closed at $1.21.

In addition, a group of institutions led by Fairfax Financial took down $121-million of shares and warrants. Coming out of this deal, the toy maker will have a new $50-million asset-based line a credit from Wachovia Capital Finance. Mega Brands financial advisor, N M Rothschild & Sons, signed off on a fairness opinion on this restructuring.

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