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With Mattel, Montreal’s Mega Brands builds stronger battle against Lego
by Armina Ligaya
Touch-screen gadgets have become so sophisticated, yet so intuitive that even a toddler immediately knows how to use an iPad. These shiny, interactive screens also offer kids limitless opportunities to build virtual worlds in an instant, making for devices with an addictive hold over children that some parents liken to crack cocaine.
Does the humble interlocking brick, little changed for decades, really stand a chance? Actually, to quote the ubiquitous song from The Lego Movie, Everything Is AWESOME!!!
Construction sets, such as Lego and Mega Bloks made by Montreal’s Mega Brands, was the fourth-fastest growing toy category last year. And judging by The Lego Movie’s massive box office take (No. 1 for three weekends and counting), snap-together plastic bricks are even experiencing a cultural renaissance.
When playing with these kinds of toys, children are captured by being able to create whatever they can conjure up in their imagination, with their hands, all while building skills from math to physics and even teamwork on joint projects, said Nina Howe, professor of early childhood and elementary education at Montreal’s Concordia University.
“Young kids very much like the sensory-motor aspect, being able to feel and touch and to construct and build,” she said. “You can’t do the same thing on a screen. There is something about the three-dimensional aspect and being hands on that’s really important for young kids.”
It’s what prompted Mattel Inc. to agree to pay US$460-million for Mega Brands Inc., the second-largest player in the building blocks segment where the toy giant doesn’t already have any offerings. After the announcement of the friendly-deal on Friday, Mattel chairman and chief executive Bryan Stockton said its purchase of Mega Brands would “immediately position us to be a meaningful player in the construction category.” Buying Mega Brands was easier than launching a construction line of its own.
Young kids very much like the sensory-motor aspect, being able to feel and touch and to construct and build
“If you think about how construction works, it’s not just a boy’s toy anymore and it really crosses gender and ages and things,” Mr. Stockton said during a conference call with analysts. “So we think it’s a great opportunity to expand our brands like Barbie and Hot Wheels into this important category.”
Mattel’s agreement with Mega Brands offers the Montreal company $17.75 per share, a 36% premium over Thursday’s closing price. The deal, which has been unanimously approved by the board of directors, is a fantastic exit for chief executive Marc Bertrand and his founding family, as well Fairfax Financial Holdings Ltd., who together hold approximately 39% of the outstanding shares. It comes after a tumultuous journey for Mega Brands, which was near collapse in 2010.
In 2006, Mega Brands had to recall its lines of magnetic toys after a child was killed and dozens more were injured. The children had swallowed tiny magnets that had popped out of the toys. The grisly PR crisis weighed on sales in the coming years. By 2010, the Bertrand family and Fairfax had to save Mega Brands from bankruptcy with a recapitalization plan and debt restructuring.
Over the last few years, thanks to key licensing agreements to make toys based on Microsoft’s popular video game Halo and Marvel’s Captain America and Thor characters, Mega Brands came back from near death. The company signed a licensing deal with Mattel in 2012, to make Mega Bloks lines featuring the Barbie and Hot Wheels brands, and the resulting deal evolved from that, said Mr. Bertrand.
“We had our challenges, but we have great products, great brands, great people here… We’re very excited with what’s happening with Mattel right now, because we think that’s going to open up many new opportunities for our brand, for our people,” Mr. Bertrand said on the conference ca
It also helps that the construction toy category continues to rise to new heights. While overall U.S. toy sales are stalling, dropping to US$21.76-billion last year from US$21.98-billion in 2012, the construction set category grew from US$1.99 billion in 2012 to US$2.04-billion last year, says Lutz Muller, a consultant at Klosters Trading Corp. in Williston Hills, Vt., citing NPD figures.
Sales are partially driven by well-meaning parents. They feel good about buying toys they believe stimulate their child’s development, said Lisa Serbin, a professor of psychology at Concordia.
“Parents tell me that Legos are part of their investment portfolios… It’s a joke, cause they’ve spent so much money on the darn things, but it also means, yes, they’re investing in their children’s future when they buy them,” she said.
Lego is by far the dominant leader in this category, with more than 75% market share worldwide, but Mega Bloks is a strong number two with about 11% in the U.S. and a nascent presence overseas, said Mr. Muller. Mega Brands has never had the resources or relations to really break into the international market. With Mattel behind it, Mega can take on the Danish construction set goliath in a way it could never have done on its own, Mr. Muller said. Though, with Lego’s clear savvy in racking up licensing agreements and movie deals, Mega Brands and Mattel will have their work cut out for them, he said.
“Mattel is not only the number one [toy maker] in the States, Mattel is number one in the world. So, Mattel has a lot of resources to put Mega on the Map against Lego, worldwide… It’s going to be fun and games to watch what’s going to happen,” Mr. Muller said.
Back in Montreal, where the 1,700-employee company was founded and is based, there is no written agreement to keep the headquarters and manufacturing there, said Mr. Bertrand. Mr. Bertrand will stay on as an advisor during the transition, but it is unclear what his role will be beyond that.
However, Mr. Stockton said Friday Mattel plans to maintain Mega Brands’ headquarters, which has proven expertise in marketing, design, development and engineering.
“The Montreal manufacturing facility is also an integral part of the business that provides expertise in the construction category,” he said on the analysts call. “We plan to continue to invest in this facility and have no plans to shut it down.”

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