November 9, 2009 / 1:10 PM / 9 years ago

UPDATE 2-Mega Brands, Rosens settle toy suit

* Toymaker to record $72 million recovery

* Settlement related to Rose Art purchase

* Shares up 39 pct at 67 Canadian cents (Recasts, adds company comments; in U.S. dollars unless noted)

By Scott Anderson

TORONTO, Nov 9 (Reuters) - Toymaker Mega Brands MB.TO and the former owners of a toy company it bought have both claimed victory in a messy court case dating back to 2006 involving deadly children’s toys.

Montreal-based Mega Brands said on Monday that it would book a $72 million recovery when it reports its quarterly results after it settled a legal action related to the takeover of Rose Art Industries, which Mega Brands bought from the Rosen family in 2005.

The Rosens filed suit in 2006 claiming earnout payments and damages related to the deal for New Jersey-based Rose Art. Mega Brands countersued, claiming the Rosens withheld and misrepresented information about serious defects in Rose Art’s Magnetix line of construction toys.

One child died and 27 others were seriously injured after swallowing small, powerful magnets that came loose from the Magnetix toys, which were acquired as part of the takeover of Rose Art.

Under the terms of the settlement, Mega Brands will receive about $17.2 million. The Rosens forgo all claims for additional consideration, totaling $54.8 million.

“It’s definitely a victory for Mega Brands,” said company spokeswoman Carine Sroujian. “It really is great news. It improves our cash flow and positively impacts our balance sheet immediately.”

In exchange, Mega Brands will drop its $200 million counterclaim against the Rosens.

But the Rosens claimed that, given Mega Brands’ worsening financial condition, its downgrade to a junk rating and the increasing prospects of it filing for bankruptcy, they were left with no choice but to give up their claim.

“We dropped this case solely on the grounds of their financial weakness and no other reason,” said Lawrence Rosen. “Based on their balance sheet we believe that they are in a very weak position and it wasn’t worth spending excess money.”

Mega Brands’ Sroujian refused to comment on the company’s financial situation, noting that it expects to report its third-quarter results on Nov. 13.

“There is no sense in addressing their false claims,” she said. “We are on track with our 2009 business plans and Friday you will be able to see how on track we are.”

Shares of Mega Brands, best known for its Mega Bloks line of construction toys, were up 39.6 percent at 67 Canadian cents on the Toronto Stock Exchange.

The toymaker is still recovering from a recall of the Magnetix toys, which began in 2006 and was expanded in 2007.

In March 2008, the company announced two separate recalls after reports of magnets coming loose from several toys manufactured in China.

The company decided to downsize operations in the former Rose Art manufacturing facility in China and outsource production.

$1=$1.05 Canadian Reporting by Scott Anderson; editing by Rob Wilson

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