Deal with Unity Acquisitions likely to close quickly, says BLG's Denes Rothschild
The parent company of Mastermind Toys has managed to find a buyer for its failing business. The transaction will essentially preserve the competitiveness in the Canadian toy sector today, which wouldn’t have been likely if the Competition Bureau hadn’t moved to review an earlier buy-out offer made by a toy-industry competitor.
Mastermind said it intends to sell the majority of its retail locations to Unity Acquisitions, a company owned by Joe Mimran, Frank Rocchetti and David Lui. Mimran is best known for founding the Club Monaco and Joe Fresh clothing brands. In the press release announcing the deal, there was no mention of Unity owning other toy-related companies, only apparel retailers.
In comparison, as Canadian Lawyer was the first to report, Mastermind’s earlier deal was with Toys R Us, a direct competitor. That deal triggered an automatic review process by the Competition Bureau. This process was extended when the bureau issued a supplementary information request (SIR), which Mastermind blamed for leading to the deal's collapse.
“If this alternative transaction goes through, the bureau looks like they’ve done a good job. They prevented what they thought would be – or at least could be – a problematic merger. And they’ve kind of pushed Mastermind into the arms of a more competitively preferable purchaser,” says Denes Rothschild, a partner in Borden Ladner Gervais’ competition/antitrust and foreign investment group.
Rothschild was the one to link Mastermind’s original intended purchaser with Toys R Us after reviewing public documents, and he could understand why, from a retail point of view, the Competition Bureau would take an interest in a merger between two toy stores.
Only later (thanks to a tip from a reader) he learned that the owner of Toys R Us (and Sunrise Records), Putman Investments, owns Everest Wholesale, a toy wholesaler and distributor.
“It may have been, there was a bigger concern [at the bureau] about the wholesale level than at the retail level,” says Rothschild. “If legitimately, there was concern that would potentially cause consolidation at the wholesale level, then I can understand more [of what] the bureau was thinking.”
He explains the Competition Bureau would have wanted to conduct an analysis and ask questions such as “Are there alternative wholesale toy providers, or would this result in Toys R Us controlling a vast majority of the toy wholesale business in Canada?” and “Could an alternative competitor emerge to challenge that dominance?”
According to Rothschild, the bureau still would have taken into account Mastermind’s financial troubles – the company is currently restructuring under the protection of the Companies’ Creditors Arrangement Act (CCAA) – and its status as a failing firm, but those economic issues wouldn’t have been enough for the bureau to rubber stamp its approval on the takeover, especially if “there are other, more competitively friendly alternatives, and lo and behold, it looks like they’ve found a purchaser who doesn’t have any wholesale or retail overlap with Toys R Us,” says Rothschild.
Unity, however, is not acquiring all of the Mastermind stores. In its CCAA filing, Mastermind said it operates 66 retail locations in eight provinces and employs 800 people (625 part-time and 175 full-time employees). As part of the sales announcement, the company said that on November 30, it obtained court approval to conduct liquidation sales at 18 stores, and those stores are not part of the deal. In effect, that means there will be some reduction in competition after the stores close, but there is likely nothing that could be done to alleviate that situation.
“The people proposing to purchase Mastermind must be aware of store-by-store dynamics, and they’ve decided that those stores aren’t viable. The bureau is not in the business of propping up non-viable commercial enterprises. I think the bureau would take the position that while it’s unfortunate that any jobs will be lost, it’s there to protect competition, and if competition demands that a certain location be closed, it’s not really the bureau’s place to say, ‘no we want it to stay open because we don’t want jobs to be lost,’” says Rothschild.
Like the Toys R Us deal, this proposal will likely trigger a notification to the Competition Bureau, explains Rothschild.
“Assuming there are no relevant overlaps, there’s probably a good chance the bureau could clear it within 14 days of filing. And they can issue what’s called an advanced ruling certificate or a no-action letter,” meaning the bureau has no intention of challenging the proposed merger.
“If there’s no relevant overlap – whether it be horizontal, meaning competitor to competitor or vertical, meaning wholesale to retail supply chain – then usually the bureau is pretty good about recognizing commercial imperatives and clearing deals that clearly have no issues quite quickly.”
Editor’s Note: After this article was published, Canadian Lawyer was informed on background that the transaction is not subject to mandatory merger notification to the Competition Bureau, because it does not meet the applicable notification thresholds.
