March 19, 2008 / 8:30 PM / 10 years ago

UPDATE 1-Mega Brands stock sags on $30 mln recall charge

(Adds details, closing stock prices. Figures in U.S. dollars unless noted)

By Susan Taylor

OTTAWA, March 19 (Reuters) - Shares in Mega Brands MB.TO sank nearly 16 percent on Wednesday to an all-time low after Canada’s biggest toy maker said it will take a $30 million fourth-quarter charge, largely for recent toy recalls.

The news comes amid a resurrection effort, as Mega Brands attempts recovery from the massive recall of another magnet toy, integration woes from its 2005 Rose Art acquisition, and supply problems in China.

The Montreal-based company issued two new recalls this week after learning of 44 reports in the United States of magnets coming loose from several toys manufactured in China.

In one case, a 3-year-old boy is receiving medical treatment to remove a magnet from his nose. One 18-month-old boy was found with a magnet in his mouth.

About 1.1 million Magtastik and Magnetix Jr. pre-school toys and 1.3 million MagnaMan action figures are being recalled because they include magnets that can detach and are hazardous if swallowed or inhaled by young children.

If multiple magnets are swallowed they can attract each other and cause intestinal tears or blockages, which can be fatal.

The company said late on Tuesday it expects to take $18 million in charges for the recalls, and additional charges from its expanded Magnetix recall announced in April 2007.

In 2006 Mega Brands first issued a global recall of its Magnetix toys, which killed one child and seriously injured 27 others who swallowed small, powerful magnets.

The company also expects to take a $7 million charge for inventory writeoff of Magnetix in advance of its new MagNext product launch in 2008. A further $5 million charge is for a reserve for outstanding claims against the company.

“Mega Brands views this third voluntary recall differently, given news magnets were coming loose versus incidents of ingestion requiring emergency intervention in previous recalls,” RBC analyst Sara O’Brien said in a note Tuesday.

“Related to this latest set of recalls, Mega Brands is not aware of any civil lawsuits.”

Much of the cash-flow impact from the charges has been incurred, Mega Brands said, with the future impact estimated at about $5 million.

The shares fell by 62 Canadian cents to end at C$3.32 on the Toronto Stock Exchange. So far this year, the stock has lost about 42 percent of its value.

MagnaMan and Magnetix Jr. sets are no longer in production, the company said this week.

Magnetix is being replaced by MagNext toys, which Mega Brands developed with quality and safety lab Intertek. Launched at the New York Toy Fair in February, it has no magnetic parts that can be swallowed, with magnets insert-molded into plastic parts, Mega Brands said.

The company outlined a sweeping turnaround plan in December to counter a long list of woes. It plans to reduce inventories, improve supplier deliveries, better integrate with its manufacturing in China and use new planning tools.

Mega Brands, which will announce quarterly results on March 31, also said on Tuesday that it was asking its bankers to amend its credit agreement, but did not say what specific action it requested.

Mega Brands said the changes will “ensure an orderly process” as it considers the sale of its stationery and activities business. There were several unsolicited expressions of interest for the business, the company said two weeks ago.

$1=$1.01 Canadian Reporting by Susan Taylor; editing by Rob Wilson

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