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Marc and Vic Bertrand finally got the big toy they were hankering for.

The brothers who run construction toy giant Mega Bloks Inc. had been looking for an acquisition to broaden their product portfolio. Their search ended yesterday with a $315-million (U.S.) deal to take over the Rose Art group of Livingston, N.J., the No. 2 U.S. player in the rapidly growing arts and crafts category after Crayola manufacturer Binney & Smith Inc.

The deal is by far the biggest done so far by Mega Bloks -- founded in 1967 by Marc and Vic's parents -- and will double its sales in one fell swoop, to the $500-million range.

Montreal-based Mega Bloks has already successfully challenged Danish rival Lego's global dominance of the plastic building-brick business. Now, it can add Crayola to its list of high-profile competitors.

Mega Bloks will vault from the ninth- to the fifth-largest publicly listed toy company in North America, based on sales.

An acquisition was in the cards, but some observers said the size of the transaction was larger than expected. "Everybody saw an acquisition coming. The surprise is that it doubles the revenues of the company," said David Pupo, an analyst with Orion Securities Inc.

Mega Bloks shares jumped to $20.75 (Canadian) on the Toronto Stock Exchange yesterday, to close up $2.20 or almost 12 per cent.

For Mega Bloks president and chief executive officer Marc Bertrand, the cash-and-stock deal is worth mussing up the company's clean balance sheet with about $300-million (U.S.) of debt. His brother, Vic, is executive vice-president and chief operating officer.

Rose Art Industries Inc. and a group of related companies are in the categories Mega Bloks was eager to enter, he said: arts and crafts, school supplies, games and puzzles. Rose Art even offers the opportunity to extend Mega Bloks' plastic building-bricks catalogue with a line of magnetic construction toys, he said.

"We like these categories. That's the primary reason for this transaction. They offer steady, good growth," said Mr. Bertrand, adding that the acquisition will add at least 15 per cent to share profit in the first full year.

The $1.8-billion arts and crafts market in the United States alone is three times bigger than Mega Bloks' core business of construction toys, he said.

Jeffrey Rosen, the executive vice-president and grandson of Rose Art's founder, said he and his brother -- CEO Lawrence Rosen -- like Mega Bloks' offer because it will give them the "global platform we need." About 90 per cent of Rose Art's sales are in the United States, whereas Mega Bloks has diversified its sales in the United States, Europe and Asia.

Rose Art -- whose products include crayons, markers and pencils, play dough, beads, cosmetics, colouring books and construction paper -- also allows Mega Bloks to spread sales more evenly throughout the year, Mr. Bertrand said.

"Arts and crafts is one of the hottest categories right now," said Maria Weiskott, editor-in-chef of New York trade publication Playthings.

"This is good for Mega Bloks. They won't have all their proverbial eggs in one basket and they are going into a robust category."

Terms of the deal -- expected to close by the third quarter -- call for the two Rosen brothers to stay on at subsidiary Rose Art and for Lawrence to join Mega Bloks' board.

The financial terms of the agreement call for Mega Bloks to pay $295-million in cash plus $20-million in Mega Bloks' shares and to assume $35-million of Rose Art debt.

There is also a contingent "earn-out" payment of up to $50-million next year if Rose Art's adjusted cash flow exceeds $50-million, as well as three other potential earn-out payments through to 2007.

Mega Bloks has lined up credit facilities of $450-million from Bank of Nova Scotia and Bank of Montreal, and the company plans to issue about $55-million of equity in a private placement to reduce the debt.

Mega Bloks also said it anticipates cost savings of between $7-million and $10-million in the 18 months following the closing, as well as cash flow savings of about $100-million over the next 15 years resulting from the amortization of goodwill for tax purposes.

Crafting a deal

Toy make Mega Bloks is doubling the size of the company with the $315-million (U.S.) purchase yesterday of Rose Arts, a U.S. leader in children's craft kits and magnetic building sets.

Toy Sales

U.S. sales of traditional toys

Other: 73%

Arts and crafts: 12%

Games/Puzzles: 12%

Construction toys: 3%

TOTAL SALES: $16-billion (U.S.)

Arts and crafts markets

Other: 60%

Crayola: 14%

Rose Art: 10%

Flying Colors: 6%

Hasbro: 6%

Fisher-Price: 4%

TOTAL SALES: $1.8-billion (U.S.)

Mega Bloks

Colourful building blocks for preschoolers have provided a strong foundation for the company as it expands into toy products for older children

2004 SALES DISTRIBUTION

North America: 57%

International: 43%

Employees: (North America): 1,000+

Headquarters: Montreal

MAJOR SHAREHOLDERS

Public: 80.7%

Victor J. Bertrand: 19.3%

Year established: 1967

Sales: $237.7-million (U.S.)

Income from operations: $31.9-million

Total assets: $150.1-million (U.S.)

Rose Art

Creative play products, school supplies and building sets have helped Rose Art become the second-largest player in the U.S. arts and crafts market.

2004 SALES DISTRIBUTION

United States: 90%

International: 10%

Employees: (North America): 1,000+

Headquarters: Livingston, N.J.

MAJOR SHAREHOLDERS

Lawrence, Jeffrey

and Sydney Rosen: 100%

Year established: 1923

Sales: $285-million (U.S.)

Income from operations: $43.4-million

Total assets: $127.2-million

Financial data: 12 months ended March 31, 2005

SOURCE: COMPANY REPORTS

Report on Business Company Snapshot is available for:
MACMILLAN BLOEDEL LIMITED

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
+1.35%97.68
BMO-T
Bank of Montreal
+1.13%132.25
BNS-N
Bank of Nova Scotia
+1.21%51.78
BNS-T
Bank of Nova Scotia
+0.94%70.07

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