MONTREAL and TORONTO — Marc and Vic Bertrand parlayed a bold attack on flagging Danish giant Lego AS into a hugely successful Canadian toy company with sales around the world based on their own version of the ubiquitous plastic interlocking brick.
Now, after struggling to deal with a nightmarish sequence of events – including the massive recall of its hot-selling Magnetix line of building sets – the Bertrands' company, Mega Brands Inc., is in the throes of its own survival battle after working out a deal for an emergency infusion of capital.
The Montreal toy maker said Monday that it has reached an agreement with Fairfax Financial Holdings Ltd. that would see the Toronto-based insurer invest $64-million in the form of a private placement of unsecured convertible debentures. Mega Brands founder and chairman Victor Bertrand Sr. will also invest $7-million in the debentures.
The announcement of the planned debt financing, which took many analysts by surprise, will lead to a significant dilution of Mega Brand's shares, and triggered speculation the company could end up going private.
Mega Brands said earlier this year that to raise much-needed cash, it would sell its stationery and activities assets, a move that was expected to bring in up to $200-million.
The decision to cut a deal with Fairfax signals that the sale process is not going well, said Stephen Boland, an analyst with Odlum Brown in Vancouver.
“They absolutely needed the cash,” he said. “It was something they had to do.”
A few years ago, as Mega Brands began to expand beyond the building-block niche of the toy industry, the company posted heady growth and attracted a loyal investor following.
The company owed some of its early success, beginning in the 1990s, to its agility in taking advantage of a slump at rival Lego. The Danish toy maker struggled in part due to cost overruns and sloppy management.
Mega Brands was emboldened, too, by a series of court challenges by Lego in which the Danish company was unable to make the case that its Canadian rival had stolen its unique toy brick design. After stealing market share from Lego in the toddler and preschool market with its bigger, multi-coloured plastic blocks, Mega developed a line of smaller bricks for older children, taking aim at Lego's core market.
But Lego has staged something of a comeback of late and it's Mega Brands' turn to grapple with the fallout from its success, including an expansion-related debt load. The company's total debt at March 31 stood at $306-million.
The $350-million (U.S.) acquisition of Rose Art Industries Inc. of Livingston, N.J., in 2005 – which included the Magnetix line and a stationery and activities business – stemmed from an effort to diversify the company's products beyond construction toys.
But Mega Brands was hit by lawsuits and three recalls of the Magnetix line of construction kits after one child in the U.S. died and several others suffered internal injuries as a result of ingesting magnets that came loose.
Fairfax chief Prem Watsa says he has confidence in Mega Brands' future. “There has been a confluence of factors, including recalls and litigation, that resulted in the company's loss in 2007, the first for the company in its storied 40-year history,” Mr. Watsa said in an interview.
The shares fell Monday to a new low before recovering. They initially dropped 34 cents to $2.65 but ended the day at $2.90, off 9 cents or about 3 per cent.
Mega Brands spokesman Harold Chizick said the Fairfax transaction – which would result in Fairfax holding about 35.4 per cent of the toy maker and which is subject to approval by the TSX, among other conditions – will provide the needed liquidity for the second half of the year and the key holiday season.
“This will restore the company back to being profitable,” he said.
The transaction is expected to close on Aug. 19 and Fairfax will get a seat on Mega Brands' board of directors.
© The Globe and Mail
