Bankruptcy and Restructuring at

Marvel Entertainment Group

Chen Ziqiang
Wu Libin
Lin Yingshuai
Deng Linli
Lim Yihao
2011/11/29
1. Why did Marvel file for Chapter 11? Were the proble ms caused by bad luck,
bad strategy, or bad execution?

We think that Marvel filed for Chapter 11 mainly due to its bad business
strategy.
Three of its six business lines, Trading cards, Stickers and Comic Books
started facing the decline in sales after year 1993. There were two main reasons
for this decline: First, these businesses increasingly had to compete with
alternative forms of child entertainment (mainly video games). Second, the
decline in sales was driven by disappointed collectors who had viewed comic
books as a form of investment and stopped buying them as company stopped
increasing the prices. We believe that the company should have foreseen these
events while performing a market research and forming a long-term business and
financial strategy.
The three unpromising business lines accounted to 61% of total revenues
of a company in year 1995. At the same time, the company's financial strategy
was based on highly optimistic business expectations and was not suitable for
unfavorable turn of demand for entertainment products towards video games. Due
to its high leverage (52%), the company was not able to serve all the debt in case
of sharply declining revenues. It is obvious that the company did not anticipate the
change in customers' preferences and was wrong in prediction of market trends,
focusing on cards, stickers and publishing business lines and leveraging itself.
Moreover, in 1995 Marvin continued its leveraged expansion into
entertainment cards business - acquiring Skybox. This decision was extremely
imprudent, as the company was already on the threshold of financial distress and
should have sought for high growth opportunities to expand in order to boost its
revenues instead of adding debt to buy business whic h produces non-demanded
products.

Operating ratios Marvel Entertainment Group

1991 1992 1993 1994 1995 1996
Sales 115.1 223.8 415.2 514.8 823.9 581.2
Cost of Sales 58.2 112.6 215.3 275.3 383.3 372.4
Cost of sales/ Sales 50.6% 50.3% 51.9% 53.5% 46.2% 61.4%
SG&A 21.4 43.4 85.3 119.7 231.3 168
SG&A/Sales 18.6% 19.4% 20.5% 23.3% 27.9% 28.9%
Net Income 16.1 32.6 56 61.8 -48.4 -27.9
Net Income/Sales 14.0% 14.6% 13.5% 12.0% -5.8% -4.8%

As can be seen in the table above, Marvels operating ratios dropped

dramatically. The cost of Sales/Sales rose from 51% in 1991 to 62% in 1996,
together with the SG&A expenses/Sales rising from 19% to 29%. Additionally
Marvels Net Income/Sales dropped from 14% to -5%.
 Leverage ratios Marvel Entertainment Group
1991 1992 1993 1994 1995 1996
Total Debt 355,3 324,7 585,7 934,8 977
Shares outstanding 97,7 98,6 102,6 103,7 101,3 101,8
Share price 5 12 26 16 12 4
Market value of equity 488,5 1183,2 2667,6 1659,2 1215,6 407,2
Debt/ D+E 23,1% 10,9% 26,1% 43,5% 70,6%
EBITDA 35,5 67,8 114,6 119,8 214,7 40,8
EBITDA/SALES 30,8% 30,3% 27,6% 23,3% 25,9% 7,0%
Interest expenses 3,50 6,50 14,60 16,50 43,20 42,70
EBITDA/Interest 10,1 10,4 7,8 7,3 5,0 1,0

Compare the management policy and the leverage ratios from that time
together with its operating ratios, we believe Marvel made an extremely impudent
move to acquire Skybox in 1995. While their operating margins where
deteriorating and their leverage coverage ratio (EBITDA/Interest) where falling,
they should have acquired a different policy.
For all above stated reasons, we believe that the company's financial
problems were caused mainly by bad strategy and poor management.

2. Evaluate the proposed restructuring plan. Will it solve the proble ms that
caused Marvel to file Chapter 11? As Carl Icahn, the largest unsecured debt
holder, would you vote for the proposed restructuring plan? Why or why
not?
A.) We believe that the restructuring plan can only solve part of the
problems that Marvel is facing. We also believe that the proposed restructuring
plan will not solve the actual problems that Marvel is facing but only provide
temporary relief to the company that is not sustainable.
The proposed restructuring plan aims at providing liquidity to Marvel,
lifting its debt burden and expanding its existing toy business. This is to be
achieved by means of a recapitalization of the company through an emission of
427mn additional shares of common equity for a total value of USD 365mn.
Additionally, the outstanding public debt of the company shall be retired with debt
holders being paid in the shares that acted as collateral for their loans. With the
proceeds of the emission and the lowered debt burden, Marvel is then supposed to
acquire the remaining stake in ToyBiz, its toy manufacturer subsidiary.
The recapitalization through the issue of 427mn new shares would solve the
acute liquidity problems of the firm and the retirement of the firms public debt
would lower the debt burden of the firm significantly. However, we believe that
Marvel, under the proposed plan, would use its newly gained liquidity and
flexibility to the wrong end. The acquisition of the remaining shares of ToyBiz
would mean the continuation of an already ill- fated strategy that led to the current
crisis. We therefore believe that the restructuring plan can only solve part of the
 problems that Marvel is facing. More precisely, the plan offers a solution for the
symptoms of the underlying problems only. It solves the liquidity problem that
caused Marvel to violate some of its debt covenants and it also lowers the
companys debt burden. The core problem in our view, the business strategy of
Marvel, is not abandoned but even pursued further.
B.) I would not you vote for the proposed restructuring plan. The shares
being pledged to their bonds as collateral are valued largely lower now than they
were when the bonds were first issued, which result in they can only recover a
fraction of the face value of their bonds in the form of equity now and a breaking
even again seems questionable. This argument does not necessarily hold for the
investors who bought the deeply discounted bonds but given the valuation of Bear
Stearns it is questionable whether they will recover their investment either.

3. How much is Marvels equity worth per share under the proposed
restructuring plan assuming it acquires Toy Biz as planned? What is your
assessment of the pro forma Financial projections and liquidation
assumptions?

Marvels current market price that is 2 dollars before restricting plan assuming it
acquires Toy Biz as planned.

Table 1: Debt/Equity Ratio

With the aim to calculate Marvels equity with the proposed acquisition of Toy
Biz we used DCF model. As Debt/Equity ratios are stable (table 1), FCFE is
used to calculate the cash flow with the following assumptions.

Table 2: Assumptions
Assume: Discount Rate is equal to average Annual Return on Investments in
Stocks from 1997 to 2001.
*Annual Returns data is from histretSP.xls
(http://pages.stern.nyu.edu/~adamodar/New_Home_Page/Inv2ed.htm)
 Table 3: FCFE
401.7million/528.8 million = 0.76 Dollars per share.
It shows that Mr. Perelman pays 13.3% premium for new shares (he pays 0.85
dollars per share).

Marvels liquidation value

Table 4: Marvels liquidation value

The liquidation value is 424.7million via Chapter 7.
4. Will it be difficult for Marvel or other companies in the MacAndrews and
Forbes holding company to issue debt in the future?

The outstanding debt of Marvel has been downgraded by two rating agencies.
In 1995 S&P and Moodys downgraded the holding companies debt from B to B-.
In 1996 Moodys downgraded Marvels public debt. After that, Marvel had
announced that it would violate specific bank loan covenants due to decreasing
revenues and profits.
Downgrading of debt increases the change of default. After downgrading of
debt, the process of probability to default increased substantially. The low credit
rating indicates a high risk of defaulting on a loan and, hence leads to high interest
rates or the refusal of a loan by the creditor. Investors realize this risk and therefore
would demand a higher default premium. The increased default premiums raised
the cost of capital for the holding company. Given the increased risk premium and
default possibilities, Marvel and other companies in the MacAndrews and Forbes
holding group would having more difficulties issuing new debt in the future.
Debt holders and creditors where raising questions about the integrity on the
judgment decisions from Perelman. Judge Balick approved Marvel did not
discriminate unfairly against non-affecting creditor classes and provided it was fair
and equitable to all classes. In reaction, a lawyer challenged the Bearn Sterns
conclusions and insinuated Bearn Sterns had multiple levels of conflicts due to the
contingency fee provided by Perelman. In the end even the Vice-Chairman of the
Andrew group had to come with a statement to overcome all the negative sounds in
the market. Anyhow it looks like Perelmans reputation was damaged already.

5. Why did the price of Marvels zero-coupon bonds drop on Tuesday, Nov 12,
1996?Why did portfolio managers at Fidelity and Putnam sell their bonds on
Friday, Nov 8,1996?

On Nov 12, 1996, Marvels zero-coupon bonds fell by more than 50% when
the spokesman for the Andrews Group announced the details of the proposed
restructuring plan. According to the announcement, Perelman was to purchase,
through Perelman-related entities, 410 million shares of newly- issued Marvel
common for $0.85 per share, 81% discount to the then prevailing market price of
$4.625. The newly- issued stock would not be subject to the pledge of
Perelman-owned Marvel stock that otherwise secured the bonds. The
announcement of this self-dealing transaction was in no way foreshadowed by
Marvels' prior public statements and conflicted with the covenants in the
indentures to the bonds. Therefore, the market prices of the bonds to decline
suddenly as the collateral that supported the bonds. Perelman's Marvel common
stock holdings pre-proposed transaction was diluted from 80% of the equity in
Marvel to less than 16%. The terms of the prospective transaction required Marvel
to increase the number of its outstanding shares to approximately 511.6 million
shares from 101.8 million, diluting Marvel common stockholders and greatly
reducing the value of the shares that were pledged as collateral for the bonds. So it
greatly impaired and reduced the value of the bonds. In fac t, Marvel bondholders
were divested of virtually the whole of their collateral while Perelman would
maintain 80% ownership of the firm, purchasing the newly- issued shares at
grossly sub- market prices while preserving the ability to write off Marvel's losses
against the reported income in his other consolidated enterprises due to the
maintenance of his 80% ownership of the firm.
The price of Marvels zero-coupon bonds dropped also due to it did not
meet the expectation of the debt holders, who analyzed the bond by fair value or
future growth of the firm. In addition, the public would predict that the
restructuring plan could not be settled down so that the firm would have a very
uncertain future, even bankrupt. Thus, the price declined because a lot of debt
holders could not bear the risk for getting nothing and sold out their debts.

On Nov 8, 1996, Howard Gittis, vice chairman of Andrews Group, called

Fidelity Investments and Putnam Investments, two of the largest institutional
holders of Marvels public debt, and asked them what they would like to see in a
restructuring plan. Portfolio managers at Fidelity and Putnam decided to sell more
that $70 million of Marvel bonds at a price of $0.37 per dollar of face value on the
next day. The main reason for selling by the managers is the conversation between
Howard Gittis and them, which caused the managers considering the result of
restructuring plan. They believed the plan would disappoint the public
depending on their professional judgment. Perhaps, during this conversation, they
got some detail information of the plan which proved the present value of
Marvels bonds was overvalued. It gave the chance for them to avoid tens of
millions of additional losses in diminished value that would have followed and
suffer the time they continued to hold the bonds already existing facts were
revealed.
On the other hand, the managers may worried about the downgrade of the
bonds because the requirement of their portfolio allocation which constrained the
percentage of the lower graded bonds or prohibited buying such bonds. Therefore,
the bonds have to be sold to meet the requirement.