APPENDIX E. Huynink D. Ligtenberg Valuation & Value Based Management Bankruptcy and Restructuring at Marvel Entertainment Group Case Study Diederik Ligtenberg October, 2008 Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group Question 1 Why did Marvel file for bankruptcy (Chapter 11)? Were the problems caused by bad luck, bad strategy or bad execution? Although the way Perelman ran Marvel Entertainment Group looked initially brilliant, Marvel had to file for bankruptcy in the end.
Was this a matter of bad luck, bad strategy or bad execution? As the demand for comic books strengthened among the collectors, the decision to increase the number monthly titles and their price, caused the opposite of a high growth opportunity. The decision to buy two companies, Fleer and SkyBox, in a ‘collector’ segment, caused a high exposure instead of a healthy diversification as both ‘collector’ businesses began to fade as a result of the less profitable and attractive collecting of comics and trading cards.
That is why bad strategy is the main reason for the problems and the eventual filing for Chapter 11.
The perception of both businesses as ‘entertainment’, instead of ‘collectors’ made it harder to recognise the influence of a change in strategy which, for example, made the core readers of comics turn away. Especially the acquisition of SkyBox, for a 25% premium, in a declining market segment strengthened the negative effects for Marvel. However, another important factor comes across when looking at these developments. Bad execution, in the form of bad financing, can be seen as another major determinant of the problems. Looking at the debt ratios (table 1 below) in 1995 a significant increase is noticed.
Because of the financing of SkyBox, Marvel added $ 190 mn of additional debt. This additional debt forced a major increase in the debt ratio, and as a result also the risk of the company. Downgrades by rating agencies and an advice to restructure its debt were given. The way Marvel choose for a more diversified strategy can be justified. The shift towards two declining businesses, and the way to finance this switch can, Table 1 Short Term Debt Current portion Long Term Debt Long Term Debt Total Debt Total Equity Debt Ratio 992 0 35,1 201,2 236,2 84,7 73,6 % 1993 0 45,1 205,1 250,2 147,3 62,9 % 1994 0 20,2 364,1 384,3 243,0 61,3 % 1995 0 5,2 581,3 586,5 207,8 73,8 % 1996 (Q3) 28,7 625,8 0 654,5 180,5 78,4% Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group however, not be justified. A further increase in its debt ratio did not cause an upset and Marvels ratings were further adjusted downwards. Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD.
Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group Question 2 Evaluate the proposed restructuring plan. • • Will it solve the problems that caused Marvel to file Chapter 11? As Carl Icann, the largest unsecured debtholder, would you vote for the proposed restricting plan? Why or why not? The initial problems at Marvel were caused by bad strategy and bad financing. Although the market tendencies cannot be influenced and are partially irreversible the restructuring plan has to focus on the financial situation and a possible strategic change.
The restructuring plan that Perelman proposes could solve the problems of Marvel filing for Chapter 11 partially. Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group Question 3 How much is Marvel’s equity worth per share under the proposed restricting plan assuming it acquires Toy Biz as planned? What is your assessment of the pro forma financial projections and liquidation assumptions? To calculate the value of Marvel first the cost of capital has to be determined.
Return on Capital Cost of equity = 5,04(risk free rate) + . 65 (stock beta) x 5,5 (market risk premium) = 8,615% Cost of debt = 11,13 (marginal cost of debt exhibit 6) x (1-. 35) = 7,23% The data of exhibit 9 will provide the input for the firm value analysis. To calculate the WACC the debt ratio of 1997 is used. WACC = 8,615 x (1-. 882) + 7,23 (. 882) = 7,39 % In the chart below the cash flows are discounted with use of the WACC. A firm value of 135,02567 appears based on the cash flows for the period 1997-2001. This value excludes the terminal value, which requires both a growth rate and a RoC ratio.
Based on a conservative growth rate of 2% and a RoC of 11 % as of 2001 the Terminal Value from year 2001 of will be: 93,0/(,011-,02)= 1033,33. Discounted at a WACC of 7,40 % discount we come to a value of: 723,24 mn $. Including the sum of PV’s of the first four years (-82, 49 + 43,34 + 75,48 + 33,6 = 69,93), a total firm value of 793,175 mn $ arises. Including the cash of $ 98,8 (at closing 3/31/97) a total value of 891,97 mn $ can be calculated. If we substract current short term and long term debt (765,4 + 40) the value of equity is 891,97 – 805,4 = 86,58 mn $.
The amount of shares outstanding (exhibit 4): 50 mn + 250 mn = 300 mn. The value per share would be 86,58/300= $ 0,28 1997 35,3 -83 34,5 -48,5 -75,4 88,6 1998 85,5 -67,4 43,4 -24,0 -11,5 50,0 1999 52,5 -47,4 44,1 -3,3 44,3 93,5 2000 88,6 -46,7 44,8 -1,9 -42,0 44,7 2001 90,2 -45,1 45,9 0,8 2,0 93,0 in 5 years EBIT (1-t) Capital Expenditures Depreciation Re-investment Change in WC FCFF Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group Reinvestment Rate Return on Capital Expected growth WACC PV CF 37,4 3,9 5,4 7,3967 82,498 28,1 9,6 2,7 7,3967 43,349 9 6,3 6,3 0,4 7,3967 75,481 2 2,1 10,5 0,2 7,3967 33,600 3 0,9 11,0 0,1 7,3967 65,092 1 My assessment of the pro forma financial projections and liquidation assumptions would be that those are quite weak. Looking at the expected growth rate Bear Stearns is counting on, it is such a low rate, that the value per share is also very low. One could argue that the calculations of Bear Sterns are not objective, and in favour of Perelman, who has benefit by a low project growth ratio, as it gives him the opportunity to offer a sound price per share.
In addition to this the liquidation analysis does assume a very low price of the Toy Biz shares (which was caused by Perelman’s announcement) and does also value the disposition of operating assets very low at a high rate. In my opinion the restructuring plan, and the accompanying analysis of Bear Sterns is in favour of the offer Perelman made, but is lacking objectivity and shareholder value. Question 4 Will it be difficult for Marvel and other companies in the MacAndrews and Forbes holding company to issue debt in the future?
I looked up some news paper articles to find out what happened after the Marvel case with the empire of Perelman. It appeared that Perelman’s empire is not overleveraged as he argues that his holding company debt to 20% of the equity value of all his companies. Normally the bond holders in a company have a high confidence in their returns as they bear a low risk. The way Perelman ‘overleveraged’ his company could fear bond holders to issue debt to Marvel and other companies of Perelman. However, it appears, looking at the financial markets, that both bond and stock holders are short of memory.
The fact, however, that Perelman is able to leverage the equity in his companies, while minimising his exposure reduces also the risk for debt holders, at least in theory. By issuing debt in different separate holding companies, he limits the legal liability of Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group MacAndrews & Forbes. In my opinion it will be difficult in the short term for Marvel and other companies to issue debt, but in the medium- and long-term I think there will not be many problems in issuing debt.
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