Mattel to compete with Lego with $460 million Mega acquisition

Mattel Inc. dominates the market for dolls with its Barbie, Monster High and American Girl brands. But now it also wants to play with blocks.

The El Segundo giant is paying $460 million to buy Canadian construction toy company Mega Brands Inc. as it pursues what it calls a “strategic imperative” to grow beyond the categories upon which it has relied for years.

The acquisition essentially heralds a turf war between Mattel and Danish company Lego, which makes the popular plastic bricks currently being featured on-screen in box-office king “The Lego Movie.”

Lego said Thursday that its global sales rose 10% last year even as the toy industry slipped slightly. Mattel, though larger by revenue, said its revenue was up 1% for the year.

Mattel Chief Executive Bryan Stockton sees Mega as “a great near-term growth driver” and a “meaningful core brand” down the line, he told analysts in a conference call Friday.

“The acquisition will allow us to enter the construction category quickly and gives us a solid foundation to strengthen our business in the category,” he said.

Barbie sales have been stumbling in recent quarters. Hot Wheels revenue seems to have lost its spark. And across the industry, demand for action figures has struggled.

But construction toys are growing, and fast. The sector – of which Mattel has less than a 1% share – brings in about $4 billion in the U.S. and Europe.

The playthings appeal to boys and girls and are said to have educational benefits.

It is “the single largest toy category where Mattel does not play,” the company said.

Mega, however, is the second-largest company making construction toys with its Mega Bloks brand. The Montreal business estimates that $300 million of its total revenue – estimated to be $405 million for the 2013 fiscal year – comes from the sector.

Mega, which research firm NPD ranks among the top 15 toy companies worldwide, also competes in the $2 billion arts and crafts category.

Mattel has already been licensing some of its brands with Mega. The larger company said it would pay 17.75 Canadian dollars, or roughly $16, a share for Mega while also paying off or assuming Mega’s debt.

Mega stock previously closed at $13.07 a share in Toronto.

Should the acquisition go through, Mattel said it plans to continue investing in Mega’s Montreal headquarters and “had no plans to shut it down.”

Mega has 1,700 employees in 17 countries, but some 70% of its revenue comes from the U.S. and Canada. Mattel, which has 30,000 workers in 40 countries, said Mega would benefit from its international infrastructure.

The Mega board unanimously approved the deal. Shareholders including three members of the founding Bertrand family -- who control 39% of Mega’s common shares -- agreed to vote in favor.

Mega is on the line to pay a $12 million breakup fee if the arrangement falls apart. Mattel stock was up less than a percent, or 15 cents, to $37.30 in late morning trading in New York.

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