MONTREAL - Mega Brands Inc. (TSX:MB) got some rare good news on Monday, winning a $72-million settlement related to its ill-fated acquisition of the Magnetix line of magnetic toys.

The news sent the company's stock soaring on the Toronto Stock Exchange, but the toy maker still faces a crucial test in the fourth quarter in the face of stiff competition.

Under the settlement with Lawrence, Jeffrey and Sydney Rosen, who sold their Rose Art business and its Magnetix product line to the Montreal-based maker of Mega Bloks and other toys, Mega Brands will receive $17.2 million cash.

The Rosens will also drop claims totalling $54.8 million against the company.

"This settlement allows me to put all my focus and resources on competing with Mega Bloks in the marketplace rather than in the courtroom," Lawrence Rosen said in a statement.

Mega Brands says the settlement deals with all outstanding litigation between it and the Rosens.

The Rosens filed suit in 2006 claiming additional payments and compensation related to their sale of Rose Art. Mega Brands counter sued.

Mega Brands claimed the Rosens withheld information about serious defects in the Magnetix product line, which had to be recalled and redesigned after it was learned that the magnets could come loose and be swallowed by children.

"This is great news for our company. The settlement validates our long-standing view that serious defects in Magnetix were not disclosed to Mega Brands before it acquired Rose Art," Mega Brands CEO Marc Bertrand said in a statement.

"A settlement of this magnitude mid-trial speaks volumes to the merits of our case."

Analyst Lutz Muller of Klosters Trading Group says the settlement is good news because "if any company needs money right now, it's Mega."

"It will benefit their balance sheet in terms of less liabilities they're going to show," he said. "They're going to show in the fourth quarter a very, very good result as a function of the settlement."

However, Muller said the settlement does not change the basic problems faced by Mega Brands, saying buyers from the large retailers still have questions about the company.

"They are still very skeptical about the company and it's way of doing business. They also continue to have a problem with the consumers who haven't really forgotten that Mega Brands had a number of recalls in succession.

"Unless Mega has really, really, really first-class sales through (the) fourth quarter, they are going to have problems next year."

He noted that Mega Brands has a strong licence in Thomas the Tank Engine but it is going against Lego, which has about 80 per cent of the market. Lego is continuing to expand its market share and has the top licensed products such as Star Wars, Transformers and Indiana Jones.

Mega Brands "has to spend money in establishing their licence and I'm not sure they have the necessary muscle to do so."

It is has also suffered a loss in shelf space as stores push their own licensed brands, and it still has to deal with the downturn in the economy on top of everything else, he noted.

"Mega is marching into the perfect storm if you're a toy company," Muller said, noting the company had made incredible efforts in the last 18 months. "I wish them well but I think they have an uphill battle on their hands."

The company's shares were up 22 cents or almost 46 per cent at 70 cents in trading Monday on the Toronto Stock Exchange. Volume was almost three million shares.

However, Mega Brands shares remain a shadow of what they were once worth. For much of the decade, the company traded at more than $15 a share, but plunged about two years ago after it issued weak quarterly sales amid high costs associated with the Magnetix business.

The company was forced to recall more than seven million sets after at least one death and four injuries were linked to the product.

Lawrence Rosen predicted sales for his new company, Cra-Z-Art, will exceed $50 million in its first year.

The company, a division of LaRose LLC based in Randolph, N.J., produces art materials, art and craft kits, games and puzzles.

"Our Cra-Z-Art staff, which includes 45 former Rosen Art personnel, is thrilled to be back doing what we do best in creating new, exciting innovative products," Rosen said.

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