Case Study of Bankrupt and Restructuring at Marvel Entertainment Group 1) Why is Marvel in financial distress? Bad luck? Bad strategy? Bad implementation? When possible, back your claims with numbers. There are several financial problems that compromise Marvel’s financial distress. Each problem can be explained by one or several reasons. • Overcollateral: The first financial problem of Marvel is that huge amount of shares are collateralized as its holding companies’ debts. These debts were secured by 77. 3 million shares in total, accounting for 75. 9% shares of Marvel as a whole.
Issue Company Marvel Holding Inc. Marvel Parents Holding Inc. Marvel III Holding Inc. Amount ($ Million) 517. 4 251. 7 125 Due 1998 1998 1998 Secured by 48. 0 million Marvel shares 20. 0 million Marvel shares 9. 3 million Marvel shares Table 1. The Debt Financing of Marvel and its holding companies Though huge amount of shares of Marvel were collateralized, Marvel’s holding companies cannot repay these debts from their profits. These holding companies were mainly used for providing legal and financial protection, but not generating operating profit.
As a result, the repayment of these debts only counted on Marvel. Reasons of overcollateralized a. Over confidence. Perelman was over? confident about the future of the company. Marvel’s holding companies issued three main bonds during Apr? 93 and Feb? 94, when the stock price of Marvel was quite high and when the profit of Marvel was significant and still increasing. b. Over value of IRS (internal revenue service). The primary motive of these huge issue was to acquire 20 million shares, boosting Perelman’s ownership more than 80%, which is the low bound of IRS. c. Intentional Bond Defaulting.
During 1993 to 1994, bonds issued by Marvel amounted to $894 million, which would mature within 4 years. However, at the same time, the net income of Marvel was just $61. 8 million, 1/12 of bond volume. This goal can hardly be achieved in traditional industry. • Huge amount of outstanding longterm debt: The second problem of Marvel was the maturing of Marvel’s long? term debt, which was loaned mainly from banks. 9 month 1996 1995 95. 8 104. 8 For the year Ended 1994 1993 69. 6 19. 9 ($ Million) Current Liabilities 1992 14. 9 1 Current Portion of 625. 8 5. 2 long? term debt Long? term debt ? 81. 3 Table 2: excerpt from Marvel’s balance sheet 20. 2 364. 1 45. 1 205. 1 35. 1 201. 2 The long? term debt was mainly the loan from bank, which would be outstanding within a year. The article didn’t mention the composition of the long? term debt and why it will mature at the same time. A majority of current portion of long? term debt would be outstanding at March 31, 1997. The amount of current portion was even larger than Marvel’s Current Assets in total in 1996. Apparently, Marvel was not capable of repaying its long? term debt maturing within a year. Reasons of huge amount of outstanding longterm debt a.
For management team, the long? term loan from bank may not assume to be a problem when then business went well. However, when profit turned to negative, the bank apparently won’t lend Marvel money anymore without renegotiation. b. Such an amount of maturing debt at same time implied great potential risk of operating mistake. However, the management team may not pay enough attention on the risk. Operating Failure: The last problem of Marvel was operating failure. The previous two problems were solvable if Marvel generated enough operating profit. However, this company was generating negative profit in 1995 and 1996.
For the year Ended 1994 1993 514. 8 415. 2 61. 8 56. 0 1992 223. 8 32. 6 • 9 month ($ Million) 1996 1995 Net Revenues 581. 2 829. 3 Net Income (27. 9) (48. 4) Table 3: excerpt from Marvel’s Income report Reasons for operating failure: a. Bad Luck. The business turned down shortly after the third issuance. This was the direct reason of loss of Marvel’s core business. b. Over? aggressive for M&A. The merged companied also accounted for large portion of financial losses. c. Executive mistake. The executive team didn’t realize the motive of booming of this industry.
And executives also neglected the necessity of core readers. 2) Why did Marvel file for Chapter 11 rather than restructure out? of? court? There are three main reasons that Marvel filed for Chapter 11: • Disagreement from active debt holders 2 Marvel offered a restructuring plan to reach an out? of? court agreement, but the debtors were not satisfied with it. The reasons of disagreement includes: a. Marvel was in serious financial distress and could not afford for a restructure plan favorable to bondholders. b. Bondholders, especially vulture investors expected for a large part of Marvel’s value.
Their requirement directly went against shareholders and Perelman’s benefits. c. Who had the right to propose restructure plan. The holding companies’ debt holders thought that they should have the right to propose the first reorganization plan because of their ownership of collateral shares. d. Objection of the proposal about how to use the equity investment from Andrews. In the Perelman’s proposal, most of equity investment was used to acquire Toy Biz’s common share. However, the representative of debt holder, Carl Irans, disagreed with the acquisition. • Less bargain power for debt holders a.
Lower requirement for proposal approval: A successful out? court settlement requires the unanimous support from debt holders. However, in the vote after filing for Chapter 11, gaining support from only a majority of the claimants in each creditor class is easier than from everyone. b. Making holding companies debt holders less active: dispersed holding companies’ debt holders appeared to be active because of their representative, Paul Irans. In the out? court scenarios, the active dispersed creditors were more likely to participate in reorganization plan.
However, by filing Chapter 11, Perelman provided to the creditors only the choice between approval & gain little and disapproval & gain nothing. c. Solve the debt holders’ holding problem: In out? court settlement scenario, each one of the debtors’ voting is vital to the settlement and each of them has the incentive to behave opportunistically and hold their vote until he/she is the last voter, waiting the shareholders to pay premium to buy his/her vote. While in Chapter 11 bankrupt scenario, only a majority of the claimants in each creditor class is required.
Debtors were not so much vital and had less incentive to holding. d. Gain support from Marvel’s unsecured debt holders: the unsecured creditors, who would be fully paid, of course approved for it, too. When it comes to the debtors, the pending treat of liquidation helps to solve the hold out problem and behave less opportunistically. e. Still having chance even claimants reject the proposal: There is still a chance that the bankruptcy judge would approve the plan • Strengthening Perelman’s control over Marvel By filing Chapter 11, Marvel became eligible for DIP financing. Chase Manhattan 3
Bank agreed to offer Debtor? In? Possession financing worth $100 million for Marvel with the contingence that Perelman remaining in control. In the contrast, in the scenario of out? of? court negotiation, Perelman, as the representative of shareholders, who are junior in the claimants of the company to debt holders, will lose negotiation power and became a less active participant in the restructure plan. In order to make a restructure plan favor to himself and shareholders, Perelman filed Marvel Chapter 11 bankrupt and gained support from the bank. ) Evaluate the (new) restructuring plan. Assuming that the plan is approved, will it solve the problems that caused Marvel to be in financial distress? If yes, how? If not, why not? • Improve Marvel’s Current Ratio. a. Increase current assets. In the plan, Andrew group infuses $33. 5 million directly into Toy Biz. In addition, bank provides $52 million cash as a debt agreement. Also, acquisition of Toy Biz enables Marvel to use its NOLs and get deferred income taxes worth $48. 5 million. In total, current assets increase by $134 million. b. Decrease current liabilities.
DIP financing will be cancelled and $624. 7 million current portion of LTD will be extended and maintained as long term debt. Totally, current liabilities will reduce by $664. 7 million. c. The total amount of cash reaches $98. 8 million, which is able to cover existing $40 million short term debt and $10. 7 million current portion of LTD. What’s more the Current ratio is improved from a dangerous low number of 0. 4 to a fair number of 1. 8, which is not far away from the normally acceptable number of 2.
Thus, Marvel will be relieved from current financial distress. • Increase in Long Term Debt Most of Marvel’s current portion of long tern debt will be turned to long? term debt. Along with the promissory note assumed by Marvel from Toy Biz, the long? term debt will be increased to $754. 7 million. This agreement helps to solve the current financial distress imposed by the huge current portion of long term debt, but does not solve it completely and radically, only delay the problem of debt. • Get Total Ownership of Toy Biz
Nearly 90% of the money infused by Andrews group will be used to acquire Toy Biz. IAs indicated in the case,”this acquisition will generate approximately $60 million of cash flow per year and provide a large fraction of Marvel’s revenue. ” Furthermore, this deal make the group a step closer to “an integrated entertainment and sports content company” with modest growth to Marvel and significant growth to Toy Biz. 4 • Change the Share Structure Perelman’s share maintains 80% of the new company, while the public debt holder get 14. 6%. The price of Perelman’s added shares is $0. per share. To sum up, if the plan is approved, it will not solve Marvel’s problem completed. Its problem is that Marvel’s revenue was not enough to fully pay debt holders’ claimants. Although the plan helps to dismiss Marvel’s current problem of financial distress by increasing current ratio and bring modest growth to Marvel, yet (1) It fails to solve the long? term debt problem completely, only delays it. (2) It doesn’t improve the strategy of Marvel, improve its operating efficiency or have other positive change to its business. 3)Credit rating of Marvel has deteriorated. It might not be easily get sufficient finance to its expansion, to integrate acquisition or to repay long term debt in the future. 4) What is your assessment of the pro forma financial projections and liquidation assumptions? What are the different parties’ incentives to bias the valuation and in what direction? 4. 1) Assessment of the Pro Forma Financial Projections—overoptimistic a. Overoptimistic in Marvel’s Profitability Bear Sterns projects the net revenue of 1997 is $929. mill, which is 12% more than its best performance. And the net revenue grows at a compound rate of 3. 4% during 1998? 2001. This projection is not substantial, because Marvel’s main business? sports and entertainment cards as well as Children’s activity sticker? is likely to shrink rather than growing. Little boys are distracted to other types of entertainment, like video game. b. Dubious Decreasing of CAPEX and Working Capital Marvel’s CAPEX is forecasted a huge minus in each year of this period.
This estimation is not accurate, considering Marvel will have intensive investment in theme restaurants, movie studio and so on. These actions should increase Marvel’s CAPEX and decrease its free cash flow, instead of decreasing CAPEX in the projection. c. Improper Refinance of Long Term Debt The projection improperly assumes that Marvel’s long term debt will be refinanced since 1999. And its interest rate, which is roughly estimated by net Interest expense/(STD + LTD+ refinanced LTD), goes down from 8. 8%in 1997 to 8. 6% in 2001. Marvel’s credit rating has been lowered to B? and it was suffered
Cite this Marvel Case Study
Marvel Case Study. (2018, Mar 05). Retrieved from https://graduateway.com/marvel-case-study/