A sweeping recapitalization plan aimed at reviving Mega Brands Inc. would not only slash almost $300-million of debt at the financially troubled toy maker, but also further reduce the founding family's stake in the company and massively dilute the equity.
"This is a fair and reasonable transaction for all stakeholders," president and chief executive officer Marc Bertrand said in an interview yesterday about the plan to raise $100-million through an equity issue and $121-million in a private placement.
The total debt load would be reduced to $131-million.
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The Montreal-based company also said it plans to issue about 284.7 million new common shares, priced at 50 cents per share, and 234.6 million warrants that are convertible into common shares at 50 cents each.
Mega Brands shares plummeted by about 35 per cent on the Toronto Stock Exchange yesterday on concerns about the dilution.
The restructuring would also see the Bertrand family's stake shrink to about 7 per cent from 12 per cent and further increase Toronto-based insurer Fairfax Financial Holdings' investment in Mega Brands.
But Paul Rivett, vice-president and chief legal officer at Fairfax, said trading in Mega Brands stock actually indicated support for the proposed deal because the shares never fell below 50 cents, the proposed price for the new equity to be issued.
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Fairfax is already a major investor in Mega Brands, a former stock darling that built a global business with its own version of rival Lego AS's studded plastic interlocking bricks, but ran into trouble several years ago after its takeover of U.S. stationery and crafts maker Rose Art Group.
The takeover led to a bitter legal fight between the Bertrands and Rose Art's founding Rosen family over payments the Rosens said they were owed. In a countersuit, Mega Brands claimed the Rosens did not provide full disclosure about major defects in their Magnetix line of construction toys that resulted in the death of a U.S. toddler and massive recalls of the Magnetix line.
Fairfax came to the rescue in 2008 with a $64-million private placement.
Now, in a new private placement that is a key element in the recapitalization, it's in for another $50-million, along with $40-million from Invesco Trimark Ltd. and $15-million from Mega Brands founder Victor Bertrand Sr.
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The move will leave Fairfax with an equity holding of between 20 per cent and 23 per cent, with Trimark and its funds owning 15 per cent.
Mr. Bertrand said the focus should be on the fact that a deal involving all stakeholders, including the banks, has been reached after months of negotiations, and not on the ownership details or the equity dilution.
"We're rebuilding shareholder value," he said.