Mattel Inc.'s $460-million (U.S.) acquisition of Canada's Mega Brands Inc. pits Barbie's parent company against behemoth Lego AS in what promises to be a lively fight for turf in the $4-billion construction-toy industry.
Unveiled just as Lego cashes in on the hugely popular The Lego Movie, Mattel's purchase of Mega Brands finally gives it a solid construction-toy platform on which to build a presence in a high-margin, high-growth category with huge potential in emerging markets, not to mention fresh artillery to protect its No. 1 position against encroachments from No. 2 Lego.
Montreal-based Mega Brands – which has about 10 per cent of the North American market, compared with Lego's roughly 75 per cent – needs a globe-girdling company like Mattel to make inroads in new emerging markets, Mega Brands president and chief executive officer Marc Bertrand said on a conference call for analysts and media Friday.
"We have a strong position. We think we can have an even stronger position going forward," he said.
Mega Brands' rise to prominence with its popular Mega Bloks sets was cut short when it nearly collapsed in 2010 after a series of corporate dramas including the recall of a line of dangerous magnetic toys, legal challenges from Lego over allegations it copied its interlocking brick's eight-knob pattern and a bitter fight over money with the owners of a New Jersey arts-and-crafts company bought in 2005.
Mega Brands, founded by Mr. Bertrand's parents in 1967, has been steadily remaking itself after a sweeping recapitalization plan four years ago.
Mattel chairman and CEO Bryan Stockton said the company decided to make a friendly offer to Mega Brands after testing the waters by licensing Barbie and Hot Wheels to the Montreal firm for construction sets in 2012.
Now, the two companies will "be able to take full advantage of our respective strengths," he said on a conference call Friday. El Segundo, Ca.-based Mattel brings its global marketing savvy while Mega Brands provides manufacturing and design know-how, he said.
Toy industry consultant Lutz Muller says "going up against Lego is obviously going to be a major, major challenge."
But Mattel – whose sales rose 1 per cent this past year, compared with 10 per cent for Lego – is in a good position to roll out new construction sets with Mattel brands, such as the wildly popular Monster High line of fashion dolls, said Mr. Muller of Klosters Trading Corp.
"If now, Mattel uses Monster High in connection with Mega Brands, they are going to give Lego … a real run for their money" in the girls' construction-toy segment, he said.
"What Mattel has to concentrate on is getting a very good share of the 25 per cent of the market [not owned by Lego] that's left over," he said.
Mattel said on Friday it expects the transaction to close in the second quarter; there is a $12-million break fee.
The $460-million acquisition price includes about $47-million of debt that Mattel will assume or repay.
Shareholders with about 39 per cent of Mega Brands stock – including Prem Watsa's Fairfax Financial Holdings Ltd. and the Bertrand family – have agreed to vote for the deal.
Marc Bertrand and his brother Vic – chief innovation officer – will stay on as advisers for at least one year.
Mr. Stockton said the plan is to maintain Mega Brands' Montreal headquarters and manufacturing plant and invest in the latter to boost productivity.
Mr. Bertrand said Mattel did not put its promise in writing to keep Mega Brands operations in Montreal, but that the U.S. giant values highly the specialized expertise found there.
Mattel is also known for keeping the businesses it acquires – Fisher Price, American Girl and Hit Entertainment, for example – in their home bases, he said.
"Our business is really a collection of family-owned businesses," said Mr. Stockton.