MONTREAL – Mega Brands says it is turning one of the last pages on its defective magnetic toy after agreeing to settle a U.S. consumer lawsuit ahead of what is expected to be strong third-quarter results.
The Montreal-based based company will pay up to $3.5 million in legal fees, set up a children’s foundation and refund U.S. consumers for Magnetix products they purchased.
“We still have pending matters but this was a pretty big one in terms of consumer class action,” Mega Brands vice-president legal affairs Mark Girgis said in an interview.
In 2006, Mega Brands reached a US$13.5 million settlement with 14 families, including one whose 22-month-old son died from injuries after swallowing eight Aspirin-sized magnetic pieces.
The company says it has set aside sufficient funds to cover the potential costs of the consumer class action, which doesn’t allege any personal injury claims but seeks compensation for defective purchases.
Few consumers are expected to bother applying for payments since most irate customers likely returned the toys during product recalls in 2006, 2007 and 2008.
“I think the payback is going to be pretty minimal so I don’t see a huge uptake in this thing,” said Neil Linsdell of Versant Partners.
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Mega Brands (TSX:MB) denies any liability but said it wanted to avoid the expense of continuing to fight the legal battle.
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Consumers who already returned Magnetix toys can receive $5 per toy with a maximum of three toys.
Those who haven’t returned the product can recoup the full cost of the toy with a proof of purchase or $10 per toy up to a maximum of two without any evidence. They must sign a legal declaration under penalty of perjury.
Other defendants in the case are Mega Brands America Inc and discount retailer Target Corp. (NYSE:TGT).
Under the preliminary settlement dated July 27, 2011, the three plaintiffs who brought the suit will receive $1,000 each and the law firms that represented them will receive up to $3.5 million in attorney fees and expenses.
Mega Brands will also make a $100,000 contribution in cash and products to a new foundation that will be formed to provide services for organizations addressing children’s health issues.
The defendants also agreed to pay the costs associated with administering the claims, including a website set up for that purpose.
Gerrick Johnson of BMO Capital Markets said the redemption rate from normal recalls is about 15 per cent and this effort will provide almost nothing to customers.
“It kind of turns my stomach that all we’re doing is we’re paying lawyers to chase after these sort of things,” he said from New York.
Mega Brands is still struggling to recover from the impact of the Magnetix recalls.
But analysts believe its third-quarter results to be announced the end of October will be very strong and represent its eighth consecutive quarter of improvement.
“I’m actually expecting a lot of share price movement on the third-quarter results,” Linsdell said.
He forecasts that revenues will increase 8.5 per cent to US$139 million and EBITDA will be up 15 per cent to $28.5 million.
Mega Brands is benefiting from good toy sales, especially its construction sets, and the beginning of a recovery of stationery and activities.
Toys R Us put its Halo Warthog on its 2011 hot toy list.
On the Toronto Stock Exchange, Mega Brands shares gained 32 cents, or 3.7 per cent, at C$8.87 in afternoon trading.
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