Equity Marketing Buying British Firm in Cash Deal

Equity Marketing Inc. is expected to announce today that it has acquired British firm Logistix Ltd. for $12.1 million in cash, continuing on a smaller scale a consolidation trend in the advertising and marketing industry.

Los Angeles-based Equity designs promotional marketing campaigns usually tied to a product such as the inexpensive toys its No. 1 client, Burger King, offers with children’s meals. In Logistix, Equity picked a partner that specializes in the same kind of work, albeit overseas.

Logistix, which posted revenue of $20 million in 2000, has 45 employees and clients that include Kellogg’s, Procter & Gamble and Coca-Cola.

“We are absolutely focused on staying near our core competencies,” Equity Chief Executive Don Kurz said.

“The initial goal is to expand throughout Europe,” Kurz said. The company also plans additional acquisitions, though it is proceeding cautiously, he said.

Equity, which also develops products based on cartoon characters such as “Scooby Doo,” has suffered some costly setbacks over the last two years.

In December 1999, Burger King recalled 25 million Pokemon toys imported by Equity after they were linked to the deaths of two children who suffocated after placing part of the toy over their faces. Equity was subsequently the subject of several lawsuits, all of which were either dismissed or settled, Kurz said. He declined to specify how much the litigation cost.

And just last month, Equity recalled 4,300 remote-control toy race cars that it imported for a Texaco promotion. The $12 toys tended to overheat, creating a fire hazard. Equity was not involved in another recall of Burger King toys that was announced Tuesday by the restaurant chain.

Equity is slated to announce its second-quarter results today after the market closes. Two analysts who currently cover the company predicted net income of $470,000, or 8 cents per share, a sharp decline from $3.1 million, or 41 cents, for the same period last year.

Equity’s shrinking profit is linked to Burger King’s recent reductions in promotional activity, according to Brett Hendrickson, an analyst with B. Riley & Co.

Nearly 80% of Equity’s $232 million in revenue came from Burger King last year, but that figure is expected to decline to 65% this year, he said.

Burger King is a double-edged sword for Equity, Hendrickson said. Though the Miami-based chain, with more than 8,300 restaurants nationwide, is an important revenue source, investors have punished Equity for leaning too heavily on one client, he said.

Equity’s shares fell 20 cents to close at $11.11 in Nasdaq trading Wednesday. That’s off 40% from a two-year high of $18.43 reached on Nov. 5, 1999.

At its current price, Equity, with a market capitalization of $67 million, itself might be an attractive candidate for acquisition, or the company simply could go private by buying back its own stock, analysts said.

“They have such a strong cash flow that they could possibly do one or two acquisitions and still be able to go private with a minimal amount of outside equity capital,” Hendrickson said.

Before the deal with Logistix, Equity had $37 million in cash and was on track to bring in another $8 million to $10 million this year, he said.

Kurz declined to speculate on the possibility of being acquired or going private. “Nothing we’re doing is specifically geared to that,” he said. “Whatever is going to serve our shareholders best, that’s what we’re going to do.”

In recent years, many of Equity’s competitors have been bought out, such as Upshot Marketing Group, which was acquired by Chicago-based Halo Industries.

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Too Focused?

Concerns that Equity Marketing is too reliant on one client have pushed its stock down 19% this year, though it has rallied from its lows.

Wednesday: $11.11, down 20 cents

Source: Bloomberg News