Bankruptcy and Restructuring at Marvel

Bankruptcy and Restructuring at Marvel

Case Study 2

Corporate Finance

i) Executive Summary

Martin Goodman started Marvel Comics in 1939. Marvel is famous for creating superheroes including Captain America, The Fantastic Four, X-Men and The Incredible Hulk. Marvel was eventually bought by Ron Perelman, whom set out to build a "diversified youth entertainment company" using Marvel Comics as the foundation. In the 1990s, Marvel encountered heavy losses in its comic book and publishing entities. Its debt was downgraded, and it later had to restructure due to being highly levered. Marvel filed for Chapter 11 to try and implement a recapitalization plan. It was forced to file after failing to reach an agreement with debtholders on its plan for the future.

ii) Main Text

We believe that Marvel Entertainment Group filed for Chapter 11, mainly due to bad strategy. Before their bankruptcy, Marvel operated six lines of business: Sports and Entertainment Cards (Fleer and SkyBox), Toys (Toy Biz), Children's Activity Stickers (Panini), Publishing, Confectionery, and Consumer Products and Licensing, which proved to be profitable during several decades. In the early 1990s, Marvel actually was the leading publisher of comic books. By changing its distribution strategy to concentrate on comic book, Marvel's stock price began to rise.

Failing to foreseen the future trend of media/child entertainment market lead to the chapter 11 bankruptcy for Marvel. In one side, alternative entertainment began to grow. Marvel's core businesses such as comic book and trading cards market had to compete with other forms of entertainments, mainly video games. Under this situation, three of six operated lines began to face decline in sales after year 1993: comic books, trading cards and entertainment stickers. In another side, large amount of collectors who viewed comic books as a form of investment were disappointed by realizing insignificant returns of the core businesses operated by the company. They stopped buying in 1994, causing sales to fall 19% across all distribution channels. In addition, speculators who were active purchasers in the early 1990s stopped buying after failing to realize significant returns on the comic book market as well, which could affect a 30% decline in sales over the next two years. Marvel's stock price started to fall because of the bad financial strategy of declining revenues and missed profit estimates.

Ignoring the exiting problems, Marvel continued their acquiring strategy to become a diversified entertainment company. They made an indiscreet decision to acquired SkyBox international Inc. on their expansion of trading card business. As sales already declined and the financial performance poorly in their core businesses, Marvel should seeking for growth opportunity to increase their revenue instead of trying to leverage expansion and increase their debt tax shield. The improper strategy added more debt to the company by expanding undesirable products. In 1995, Marvel lost $48.5 million due to the losses in its comic book and publishing segments. Even with the restructuring, Marvel still reported a loss of $27.9 million in the first quarter of 1996. All these factors caused Marvel file for Chapter 11.

After all the strategies above didn't work out, the company instead proposed a restructuring plan, which involving issuing new shares in exchange for debt and acquire Toy Biz, a company that made toys based on Marvel characters.

The face value of the bond equal to $894 million, 15% of 77.3 shares, the new prices of the share is $0.85, thus the actual value will be $65.705 million, which is smaller than the face values.

Through liquidation they can recover 68.9% against secured claims(mainly debt), but if the accept the restructure plan, they will get 15% shares which is 77.3 million shares, which worth $65.705million. Then Carl Icahn would not accept the restructure plan.

If the restructure plan works out, the debt holders would receive 15% of the equity in exchange for debt. In spite of the interest savings, they will also get $60 million of cash flow from Toy Biz'ser revenue every