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Warrant deal cuts Mega Brands debt in half

A file photo of Marc Bertrand of Mega Brands Inc. at the company headquarters in Montreal. August 19, 2008.

John Morstad/Globe and Mail/John Morstad/Globe and Mail

Toy maker Mega Brands has struck a special agreement with its warrant holders that will immediately provide the company with enough cash to more than halve its debt burden.

On Tuesday the company announced that it signed agreements with a swath of its warrant holders under which they agree to exercise their warrants now and buy shares of the company, rather than holding off and doing so at a future date.

After working with a number of its biggest warrant holders, including Fairfax Financial Holdings and Trimark Investments, Mega Brands already has commitments to receive $55-million in cash through the deal. This money will be put toward paying down a long-term debt load that amounted to $109-million (U.S.) at the end of the fourth quarter, according to Capital IQ.

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The agreement is the second deal of its type in as many days. On Monday Dundee Precious Metals also announced a special offering for its warrant holders, allowing them to exercise their warrants at a lower price than originally stipulated. Though Dundee wasn't in need of new cash the way Mega Brands is, an injection means the company won't have to tap its credit facilities and pay interest on any new money borrowed.

Mega Brands was able to strike its own deal because its share price has more than doubled in the past year, climbing from $6.15 at the end of March 2012 to $13.80 before the warrant agreement was announced. The warrants can be exercised at $9.94, meaning they were already pretty deeply in the money.

And given that the shares jumped as much as 5 per cent on the back of the news Tuesday, it means that the existing holders should be happy to get shares. Because the debt burden will quickly fall, Mega Brands will pay much less interest -- its March 2010 debt issue came with a 10 per cent annual coupon -- and that frees up money to be reinvested in the business.

The company's rebound in the past year comes in large part from better sales, which climbed 12 per cent in 2012. Toy sales drove much of this recovery, and the North American market was particularly favourable to Mega Brands while international sales dipped.

Mega Brands also focused on costs and efficiency, spending a chunk of money in the past two years to upgrade its Montreal facility, which now builds half the company's toys.

With much less debt weighing it down, the company can now focus more on products like its Barbie and Skylander toy lines, for which it has high hopes.

(Tim Kiladze is a Globe and Mail Reporter.)

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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