Entertainment giant MCA Inc. announced Tuesday that it has agreed to acquire 63% of L.J.N. Toys Ltd. in an exchange of stock worth up to $39.8 million.
If the deal is concluded, Los Angeles-based MCA said it will make a tender offer for the remaining L.J.N. shares at $14.26 each. Based on Tuesday's closing stock prices, the acquisition of the entire company would be valued at about $65 million.
If completed, the investment will signal MCA's entry in the booming toy business.
With 1984 sales of $77.8 million, New York-based L.J.N. is not ranked as an industry leader, but it posted a 67% increase in net income last year with earnings of $6.7 million.
The acquisition would be MCA's first in four years and the highest-priced deal in its history, even though the parent of the Universal Studios complex will be giving up less than 3% of its 48.7 million shares.
In the last two decades, MCA has developed a reputation for making parsimonious bids for companies, losing out to higher bidders on such acquisitions as Sea World Inc. and Coca-Cola Bottling Co. of Los Angeles in the 1970s.
Since 1980, New York-based L.J.N. has specialized in toys based on characters in popular movies, television shows, games and personalities, using several licenses from MCA for products based on "E. T., the Extra-Terrestrial," "Dune," "Knight Rider" and "The A-Team."
The company has just begun to ship a new line of robot-like vehicles called Voltrons that analysts believe will be a hot seller. In addition, L.J.N. has a license to market Thundercats, based on part-human, part-cat characters featured in a television show.
Shares of the toy company began began trading publicly 15 months ago, although about 55% of the stock was retained by the Hong Kong-based Uni-Investors Ltd. and another 11% by L.J.N. President Jack Friedman--the two shareholders who agreed Tuesday to sell their shares to MCA.
In a telephone interview, MCA President and Chief Operating Officer Sidney J. Sheinberg said the entertainment company has been interested in entering the toy business for some time. MCA held "periodic" discussions with L.J.N. principals in the past, but the deal was made in an all-night negotiating session ending Tuesday, Sheinberg said.
Friedman could not be reached for comment, but he has agreed to sign a long-term contract to continue as the toy company's president, according to MCA.
Mario Gabelli, head of a Wall Street investment firm bearing his name, noted that sharp market swings are a hazard in the $6-billion toy business, but he added that MCA is accustomed to managing similar risks in its core businesses of motion picture and TV production, recorded music and publishing.
"That's the business they know," he said. "They're coming (into the toy business) in a low-cost way."
MCA closed at $50.50 on the New York Stock Exchange, down 12.5 cents on a volume of 183,200 shares traded. At that price, the two largest shareholders of L.J.N. would be placing a value of $9.18 on each share of their L.J.N. holdings, far below L.J.N.'s closing price of $14.25 in over-the-counter trading.
When asked why the major L.J.N. shareholders would accept such a price, Sheinberg replied, "That all turns upon their perception of what they think MCA is really worth."
Gabelli, whose company owns a "couple of hundred thousand" shares of MCA stock, said he estimates MCA's value at $65 to $70 per share.
Under the terms of the deal announced Tuesday, MCA will exchange one share for each 5.5 shares of L.J.N. held by Friedman and Uni-Investors, for a total of 697,518 MCA shares. If the average price of MCA stock during a defined period prior to the closing is above $57 per share, the number of MCA shares will be reduced, MCA said.
Friedman and Uni-Investors have the right to terminate the deal if the closing price of MCA stock is below $43 per share on the day prior to closing, MCA said. Sheinberg, in response to a question, said the closing date has not been set.
If the acquisition is completed, the toy company will become part of MCA's Consumer Products Group, which includes publishing, merchandising and the Spencer Gifts retail store chain, Sheinberg said.
The toy business is "a business very similar to ours," said MCA Consumer Products Group President Stanley Newman in a telephone interview, noting that MCA already has "a large children's book operation" distributing some products through "non-book channels" such as Toys 'R Us.
"Toys have begun to inspire film and book properties," Newman continued, although he predicted that the current wave of TV shows and movies evolving from toys will subside somewhat. "This is not a fad investment," Newman said. "It's something we believe has long-term potential."