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Marvel

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Brady Burkle

on 26 May 2011

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Transcript of Marvel

Bankruptcy and Restructuring at
Marvel Entertainment Group By: Brian Lewis, Marcus Romeo, JC Haning, Brady Burkle Marvel History:

Started producing comics in the 1930s under the name Timely Publications
Modern day Marvel began in 1961 with the introduction of the Fantastic Four Marvel's Top Characters Spiderman Thor X-Men Daredevil Captain America The Hulk Iron Man Marvel's Original Strategy Build a diversified youth entertainment company
Focus on using the comic books as a foundation Diversification
Acquired Fleer (7/1992) Fleer was the 2nd largest trading card company
Bought for $286M, 12% Premium to trading price At time of Acquisition
"Marvel's buying it on the cheap," said Ronald Morrow, an analyst with Smith Barney. "The price is a little low for shareholders."

"We think it's worth more," said Walter Morris, head of research for the Strong Funds, a large mutual fund company in Milwaukee that is one of the largest holders of Fleer stock. New York Times, 7/25/92 Acquire Minority Stake in (3/1993) Designer and retailer of children's toys
Toy Biz received an exlcusive, perpetual, royalty free license to produce Marvel characters
Toy Biz was very profitable for Marvel and fit well into their business structure Sales Growth: 74%, 25%
Profit Growth: 74%, 30% Acquire Panini Group (7/1994) Acquired for $150M
Italian Sticker maker
The trading cards of Europe
Had Europe's largest distribution network
Market Marvel characters to Europeans 1995 Milwaukee Sentinel:
Marvel is expecting American sports leagues like NFL and NBA to have franchises overseas by end of the century Acquire Card Maker SkyBox (3/1995) Continued Efforts to become the ultimate player in the trading card industry
Purchased for $150M
SkyBox struggled in 1994 with NFL cards while rest thriveds
SkyBox had Net Income of $4M for 4Q 1994 compared to $14.9M 4Q 1993
Reason stated: SkyBox products lacked imaginative designs, top notch photography, and high tech extras “The company which is seeking to bolster its position in the struggling trading-card business, said it would pay $16 a share in cash for all of Skybox in a merger that has been approved by the boards of both companies.”
-New York Times, 3/10/1995 Trouble For Marvel Macroeconomic Conditions Marvel's core business, Comics, began to falter
An oversaturation occured in the market
Much of the success of comics were driven by investor speculation
Monthly titles increased from 45 to 140
Prices doubled from $1.50 to $3 Strikes in MLB and NHL Young people lost interest in leagues
Began searching for other entertainment, emergence of home gaming consoles
Trading card sales decline 30% for Marvel Cards and Comics are both oversaturated as companies attempt to expand in the profitable market for trading cards
Experience a period in the early 90s of trading card inflation
Devaluing assets and speculation lead to a bubble and a subsequent bust. Warning Signs: 1990 New York Times Article:

"Determining how long a fad will last is never easy, but the people who control the Fleer Corporation, which has seen its sales and profits soar on the boom in baseball card sales, have evidently decided to cash in as soon as they can."

"For years, with more and more cards being printed by several companies, there have been forecasts that the baseball card bubble would burst. But so far it has not, and the boom has been very profitable for those who are in on it. Fleer is such a company. "

"The catch is that fads seldom level off. They grow and grow, and then they end abruptly. It appears that the insiders at Fleer want to be sure they are protected against the possibility that the end of this fad is near."

In 1993:

Neil Gaiman, creator of the popular Sandman character, gave a speech at an industry gathering of 3,000 retailers, comparing the popularity of comics to the mania over tulips in Holland in the 17th century. Bad Strategy Marvel seemed to be unaware of the bubble occuring in both comics and trading cards
Were not aware that the oversaturation of these areas would lead to a demand destruction in their products Oblivious to Asset Bubble Lack of True Diversification Marvel's strategy was to become a diversified youth entertainment company
It appears on paper to have 5 segments to their company
These segments were, in fact, driven by the core comic business Diversification Issue: Trading Cards - Largely unrelated to the rest of the business operation, although the entertainment cards will derive some correlated success to Marvel characters

Toys - The success of this segment is largely derived from the success and quality of the comic books and their characters

Activity Stickers - Rely on the same success as toys

Publishing - The heart of where Marvel can drive their overall business success

Confectionary - Unrelated

Licensing - Small, but driven by comics success Losing Focus on Revenue Driver Comic books were not only souring in the eyes of speculative investors
Comic fans were disappointed in the lack of quality in the stories "Amid the pressure to pump out more titles, Marvel comics had also dropped in quality, with splashy art by inexperienced artists replacing the clever plots and dialogue that had hooked so many longtime Marvel fans."

''You had a lot of high-school, study-hall scribbles showing up as published art,'' Mr. Jones said. ''For fans, it was alienating, confusing and it left many fans feeling betrayed, that their habit was being taken advantage of.''

New York Times, 5/24/1998 Bad Execution Overpaying for New Acquisitions
Paid a sizeable premium for companies in an industry at the peak of a boom, soon to bust

Expanding too rapidly and assuming too much debt, leaving Marvel highly leveraged and sensitive to a business downturn NYU, 2003 Marvel's Downfall These combinations of factors hit Marvel when they appeared on an earnings report in late 1995.
Losses of $48.5M on sales of $829M
Long-Term Debt was $581.3M
Loses continued through 1996 and would amount to Marvel violating its bank covenants [insufficient cash flows]
Marvel was facing nearly $1 Billion in debt due in 1998 Marvel's bonds are downgraded by Moody's and bond prices drop 41%
Marvel asks its largest bondholders what they would like to see in a restructuring plan
This causes the institutions to sell off their bonds the next day
Their bonds fall more than 50% [to $0.18] and stock drops 41% Marvel's Restructuring Propsal 1) Purchase 410M new shares @ $0.85/share [$350M]. Shares closed that day @ $2.75
2) Acquire at least 80% of ToyBiz at a 32% premium
3) Convert the bondholders to equity shares, 15% of the company Carl Icahn Makes a Different Case for Restructuring Icahn is a "vulture investor" -- invests heavily in undervalued, beaten companies
He begins to buy massive amounts [$40 Million] of Marvel bonds at deep discounts with the hope that he can control the company and sell off assets His Plan:
$350M through a rights offering
No acquisition of ToyBiz Restructuring Marvel
There is a need to sell off the unprofitable and declining assets that Marvel owns; mainly the trading card companies
Streamlining operations and the business structure to focus on imagination, creativity, and quality from the business driving segment of publications and comics Comic Characters and Creative Process Comic Books Movie Studio Productions Television Productions Franchise/Brand Power Merchandise/Toys Licensing Marvel would be best served by refocusing away from expansion in many areas and realign to focus on deriving revenue and profits from their creative areas

Acquiring Toy Biz would be a prudent move to increase cash flows to redirect to other areas of the company and pay down the mass amount of debt

Toy Biz also allows Marvel to exploit toy and merchandise sales stemming from success in Comics and Production Addressing the Issues that Put Marvel into Bankruptcy: Selling the Fleer/SkyBox/Panini Divisions Profits and Revenues (in Millions) for all 3 divisions for YE 96, 97, and 9-mo ending Sept 98 Information from Marvel's SEC Filing 10-K 1998 Use the cash received for Fleer/SkyBox to cover Marvel Debts

Risk: Selling these assets quickly will likely require accepting a price below true market value Minority Investment in Toy Biz
Marvel made a swap of the licensing rights to Marvel characters in return for Toy Biz shares
This resulted in seeing no direct revenues from the profitable and expanding toy market based on Marvel's characters Recapitalizing Marvel and It's Core Operations We believe that Marvel can see success once again due to its strength in established characters

Raising new capital through a stock offering will offer the best options for emerging successfully Benefits from Proceeds from New Stock Issuance
Raising cash will allow greater short-term flexibility to cover obligations
Can provide a start to focusing and developing film endeavours Marvel Must Cut Costs We have seen that Marvel's COGS and SGA have increased greatly in recent years
Layoffs
Eliminating operations in Trading Cards should help to refocus and lower costs
Reduce the creation of many new brands and characters to focus on the established
Increase quality by hiring back, and increasing wages of the artists and creative staffs that defected New Frontier for Revenue Growth A focus on adapting screenplays from already established Marvel characters
These movies have shown a history of success and great profits for other comic companies 1989 Title: Batman
Company: DC Comics
Distributer: Warner Bros
Budget: $48 Million
Revenue: $411 Million

Profit: $363 Million
Return: 756% 1992
Title: Batman Returns
Company: DC Comics
Distributer: Warner Bros
Budget: $80 Million
Revenue: $267 Million

Profit: $187 Million
Return: 234% 1990
Title: Teenage Mutant Ninja Turtles
Company: Mirage
Distributer: New Line Cinema
Budget: $13.5 Million
Revenue: $202 Million

Profit: $188.5 Million
Return: 1396% 1991
Title: Teenage Mutant Ninja Turtles II
Company: Mirage
Distributer: New Line Cinema
Budget: $25 Million
Revenue: $78 Million

Profit: $53 Million
Return: 212% 1993
Title: Teenage Mutant Ninja Turtles III
Company: Mirage
Distributer: New Line Cinema
Budget: $21 Million
Revenue: $42 Million

Profit: $21 Million
Return: 100% 1994
Title: The Crow
Company: James O'Barr
Distributer: Miramax
Budget: $15 Million
Revenue: $144 Million

Profit: $129 Million
Return: 860% 1994
Title: The Mask
Company: Dark Horse
Distributer: New Line Cinema
Budget: $23 Million
Revenue: $351 Million

Profit: $328 Million
Return: 1426% 1994
Title: Timecop
Company: Dark Horse
Distributer: Universal
Budget: $27 Million
Revenue: $103 Million

Profit: $76 Million
Return: 281% Filing for Chapter 11 Restructure to Reduce Inefficiencies Large increase in SGA

Increases in Accounts Payable

Slowdowns in Inventory Turnovers

Reduce Horizontal Expansion 508% Increase from 92-96 84% Increase in Days in Inventory Toy Biz Acquisition Effect Toy Biz was profitable and growing
If Marvel was to enter Chapter 7, and all assets sold off -- Toy Biz would be greatly harmed
Toy Biz relies chiefly on production and sales of Marvel characters
The two companies need each other for success going forward Estimation of Financial Effects Divest Fleer/SkyBox
Fleer/SkyBox has become very unprofitable
Estimated sale price: $25M in Cash

Panini Sticker Group
Heavily in debt, Net Tangible Asset debt of $130M
Long-Term Liability of $27M
Hope to sell this $27M in Debt at a discount Marvel's Advantages of Chapter 11
Allows the ability to restructure debt
Allows management to remain in control
Can receive favorable terms on bridge financing and loans
Litigation protection Marvel's New Options Perelman's New Proposal
Purchase 427M shares totalling $365M [$0.85/share] Bear Stearn's First Evaluation Option

Showing that Marvel is worth more as a going concern than under Chapter 7 Debt and Equity holders receive nothing under Chapter 7 Secured Debtholders (mainly banks) recoup 68.9% This option appears to have minimal benefits Second Option: Operating as a going concern without ToyBiz acquisition Bear Stearns estimated enterprise value to be between $520M-660M
Marvel was in debt for nearly $725M Third Option:
Operate as a going concern with the acquisition of ToyBiz Cash increases from new equity issuance and DIP financing Costs associated with DIP financing Restructuring of Current Debt, to Long Term Debt $365M Investment by Andrews Group for new Marvel shares Projections 1997-2001 In Addition to these Projections

Selling Fleer/SkyBox:
Raises $25M in Cash
Reduces inefficencies, costs, and debt

Selling Panini
Requires use of cash
Estimated $13.5M
Reduces Long-Term debt by $27M

Net Effect
Cash Increase of $12.5M
Long-Term debt reduction
Eliminates companies that were producing losses going forward Restructuring in Bankruptcy
Most importantly this allows Marvel to restructure current debt
Allows for financing for Marvel to sustain operations while they make improvements in the organizational structure and refocus

Marvel can emerge from bankruptcy and see substantial profits quickly with focus on movie production

Allows for a proven and repeatable strategy for profits. This is accomplished through the power of movie franchises

Bain and Company [2009]: Found that 90% of strategic comebacks were fueled, in part, by assets in the original core business The Perelman Reign
1989: Marvel Comics bought by Ronald Perelman and his empire of companies Perelman used this structure in large part to share net operating losses across his businesses

This tactic allowed him to exploit tax laws and pay very few taxes

1996: Generated nearly $600M in profits, but skillful use of the holding companies allowed them to avoid $200M in taxes 1989:1 1993: 8 2001: 43 Marvel Success and Expansion Porter's Competitive Forces:

•Threat of Entry of New Competitors : Moderate

oThere has been a great opportunity recently for profits in comics and trading cards
oObtaining licensing fees for sports cards are very costly and obtained by very few companies
oComic success can be achieved by creativity, imagination, and skillful art
oCosts are low to create a small number of comic books

•Threat of Substitute : Strong

oThere are many other comics and strong characters that Marvel must compete with
oOther comics have began to focus on other forms of media to capitalize on their comics (i.e. movies)
oCosts are similar between all brands
oExpanding number of options for the consumer

•Bargaining Power of Buyers : Moderate

oThe true target audience of comics and trading cards are young children
oThey can easily be priced out of Marvel products if prices rise

•Bargaining Power of Suppliers : Low

oMarvel is not subject to many suppliers outside of the firm
oTheir input costs are very basic products like paper and ink primarily
oThey have strong distribution channels to comic specialty shops

•Intensity of Competitive Rivalry : Strong

oThere are many top comic companies vying for market share
oEach company holds power over the consumer based on loyal to the stories of characters
oOther firms on constantly innovating new characters and new storylines SWOT Analysis:

•Strengths:
oEstablished characters with strong following
oWide variety of characters
oVariety of channels to distribute and promote Marvel characters

•Weaknesses:
oLack of true diversification in products
oLosing top creative people
oDeteriorating quality of comics
oHighly leveraged financially

•Opportunities:
oUtilize the growing demand and established success of comic characters in movies
oOpportunity to establish movie “franchises” with repeatable profits and success
oThe integrated channels for distribution of Marvel characters through comics, cards, television, toys, etc.

•Threats:
oThe growing trends in using comics and trading cards as an investment
oRapid expansion in production of cards and comics
oThe success of trading cards relies largely on the popularity of the sports and sports figures
oThe growth of gaming consoles into homes may provide other avenues of entertainment for youth Questions?

Thank You
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