Mattel Inc, the world’s largest toymaker, agreed to buy Mega Brands Inc for US$460 million, acquiring the biggest challenger to Lego A/S in the construction-toy market.
Mattel is offering C$17.75 (US$16) a share, according to a statement on Friday, a 36 percent premium over Thursday’s closing price.
The board of Montreal-based Mega Brands unanimously approved the transaction, and investors holding 39 percent of the stock, including chief executive officer Marc Bertrand and Fairfax Financial Holdings Ltd, agreed to the deal.
The purchase of Mega Brands, the world’s second-largest maker of snap-together blocks, will fill a product hole for Mattel.
It does not have its own construction line, locking it out of a US$4 billion market in the US and Europe. The category also is a bright spot in a toy industry that has seen growth stall in the US.
Mattel considered starting its own construction line, then opted instead to buy Mega Brands because it would be faster and less risky, Mattel CEO Bryan Stockton said on a call with reporters.
Mattel got its first taste of construction in 2012 when it debuted blocks for its Barbie brand through a licensing deal with Mega Brands. Mattel realized that replicating this kind of expertise would take years, Stockton said.
“This acquisition is all about growth,” Stockton said. “We see an opportunity to expand our brands in this category across boys, girls and preschool.”
Mattel shares rose 0.4 percent to US$37.31 on Friday in New York. They have declined 8.4 percent over the past year. Shares of Montreal-based Mega Brands surged 36 percent to C$17.72 on Friday in Toronto.
Mattel is coming off a lackluster holiday season, with sales sinking 6.3 percent — the biggest quarterly drop since 2009.
The toymaker has looked to acquisitions to boost sales in the past. In February 2012, it paid US$680 million to buy HIT Entertainment Ltd, owner of Thomas the Tank Engine.
It also acquired Fisher-Price Inc for US$1.1 billion in 1993, Tyco Toys Inc for US$755 million in 1996 and American Girl LLC for US$700 million in 1998.
The latest deal should close next quarter. It is expected to reduce this year’s earnings because Mega Brands has lower gross margins, Mattel said. After that, the transaction should add to profit as Mattel uses its distribution and manufacturing scale to reduce costs and its marketing skill to drive sales, the company said.
“This rounds out their portfolio,” Needham & Co analyst Sean McGowan said in New York.
Mattel will be able to expand the brand quickly by moving it into countries where Mega Bloks are not currently sold, he said.
Mega Brands is only in about half of Mattel’s markets.
Mattel will continue to look for acquisitions in toy categories where it does not have much of a presence, the company said.
Bertrand is to serve as an adviser for a year and Mega Brands’ headquarters will stay in Montreal, Mattel said.