Lego Is Expected to Announce
Deal to Make 'Star Wars' Figures
By JOSEPH PEREIRA 
Staff Reporter of THE WALL STREET JOURNAL

The Force is with Lego.

The big Danish toymaker is expected to announce Thursday an agreement to
make construction sets and figurines based on "Star Wars." The deal
represents a major line extension for closely held Lego AS, as well as a
departure from tradition. The company previously shunned movie licensing
for fear of alienating its core consumers, who tend to view its little
plastic building blocks and other products as educational.

The deal also stands to steal some thunder from Hasbro Inc. and Galoob
Toys Inc., which last October paid dearly for their own "exclusive"
licensing arrangements to make "Star Wars" toys.

Big Money

According to people familiar with the matter, Lego expects to garner $1
billion in sales from "Star Wars" products over the next eight or nine
years. That would make the line one of the company's biggest. Lego
currently has about $1.3 billion in annual sales.

Under the agreement with Lucas Licensing Ltd., Lego would receive rights
to the entire "Star Wars" cast of characters and themes, including the
three planned prequels to the original trilogy, the first of which is
expected to be released next year. But the decision to create another
"Star Wars" toymaker also seems to require some legal hair-splitting.

Hasbro, based in Pawtucket, R.I., owns the rights to make "Star Wars"
action figures taller than about two inches, in addition to die-cast
vehicles, board games, electronic hand-held games and other playthings
such as Play-Doh. Galoob holds the rights to action figures less than
two inches in height and miniature vehicles.

Under the Lego-Lucas licensing agreement, Lego will be making 1.75-inch
figures to go with construction sets for spaceships and various "Star
Wars" environments. Although the Lego figures will resemble Princess
Leia, Obi Wan and the rest of the "Star Wars" cast, they will be
attachable to Lego blocks and rendered in less detail. As Lego and 

Lucas interpret it, they don't qualify as "action figures" and present
no conflict with the Galoob agreement.
But Lego's toys may very well be Hasbro and Galoob competitors in the
eyes of consumers, since parents buying a $50 Lego Star Wars
construction set may be reluctant to shell out more money to purchase
other such-themed toys.

Understanding the Force

"Hasbro has a 20-year history of working with the Star Wars brand, and
we don't think anybody knows it as well as we do," a Hasbro spokesman
said. "We certainly understand the power of the Force," he added. "We
have the vast majority of categories, and we're very comfortable with
the categories that we're in."

Galoob declined comment. "My guess is the company doesn't know of
[Lucas's] deal with Lego," a spokeswoman said.

Financial terms of the deal couldn't be learned, but people close to the
talks said "Star Wars" creator George Lucas's licensing unit has agreed
to accept less than the whopping 20% sales royalty that has been its
average in other recent deals because it views Lego's big European
presence as a way to reach a broader market.

Before entering discussions with Lucas, Lego sounded out focus groups of
parents on both sides of the Atlantic. "Parents have very high
expectations of what Lego can and cannot do," explains Peter Eio,
president of the company's North American operations. In this case, Lego
found few objections to a "Star Wars" alliance.

The licensing agreement comes as Lego and other construction toys,
battered by hot-selling action figures, video games and other
boy-oriented toys, are slumping, with sales falling slightly to about
$600 million at wholesale in the U.S. last year. David Lafrennie, a Lego
spokesman, says "Star Wars" toys, whose U.S. sales topped $650 million
last year, were a major reason why construction slumped. A
computer-enhanced version of the space trilogy was released in movie
theaters last year.

Rich Deals

That, and the prospect of prequels, let Lucas strike some of the richest
licensing agreements in toyland with Hasbro and Galoob. Under the Galoob
deal, Lucas receives a $140 million advance "payable as the three new
films are released." In addition, it gets warrants to purchase just
under 20% of Galoob stock. With Hasbro, Lucas is receiving a reported
$500 million in cash, according to analysts, plus warrants to buy
slightly less than 5% of Hasbro stock. The combined equity value of
Lucas's Hasbro and Galoob stakes is estimated at $227.2 million.

The Galoob and Hasbro deals were struck after months of haggling and
counterbids. Lego's deal with Lucas was sewn up in just six weeks and is
believed to be less costly.

Lego has a goal of reaching $3.5 billion to $4 billion in sales and
expanding its brand presence among families with children by the year
2005. To do that, Lego officials are looking outside the traditional
construction-toy market. As part of that growth plan, Lego announced
this year that it is venturing into robotics and computer-controlled
play sets. Licensing is yet another vehicle to help the company reach
its goal, according to company officials.