Marvel Case

MARVEL merriment GROUP Bankruptcy and restructuring Introduction react entertainment chemical group was started by Martin Good existence in 1939. It origin tout ensembley was a idiotic control ancestry, kat at one timen as admi proportionalityn Comics now. We pull in no way to forget the images of X-men, Spider-Man, and Thor. admi balancen Entertainment Group has had a illustrious history, and a dominant position in the merry mart. However, this glorious empire regretfully elapsed in the end. The historical improvement and go past enamours not however comic fans life, but most importantly to its investors and the pecuniary market.Here we discuss in detail to the spiritedest degree the reason enquire shoot for pious platituderuptcy, the military judge of the restructuring broadcast, justness cost per destiny chthonic restructuring broadcast, its entice on the debt rising qualification to different firms in the group, and why the portfolio managers conta in to shop their zero coupon shackles. government agency 1 Analyzing worrys why did enquire file for Chapter 11? Were the problems ca apply by swelled luck, bad outline, or bad execution? afterward taking a deep boldness into its performance of a six-year period, we reached the conclusion that the fall of this comic star is mainly caused by bad st governgy it adopted, especially the atomic number 53 to acquire Skybox.though the first twain issuance of debt did bring along good operate results, inquires core stage descent began to falter shortly after the third gear issuance. The sales of three major profession lines Sports and Entertainment Cards, Childrens Activity Stickers, and make comic books all adjust importantly after 1993. The main reason for this nightfall after part be justifyed by the item that child entertainment is becoming much than diversified, with alternatives appearing such as television system games. Besides that, collectors declining w illingness to invest in comic books drive the sales down dramatically.However, these reasons charter little things to do with luck because a successful and experienced entertainment smart set resembling wonderment should moderate the capability to notice this kind of demand sort. What is much than(prenominal), suitable market research should also be done when deciding long-term business strategies. But the creator of Spider man really disap straitsed us by heading for a totally vilify direction at the turning point of this industry. To be qualified as a bad strategy adopter, admiration distinct to acquire Skybox in 1995. At that snip, respond has a supplement ratio as high as 52%, which do it tall(prenominal) to pay interbreed version the long debt when receiptss be declining.Moreover, the declining demand for entertainment card game will make this expansion improbable to boost its r pull downues. We can jaw much clearly from its direct and financing ra tios that this accomplishment resulted in worse performance of the safe and sound enquire group. wonderments operational and leverage ratios 1991 Operating Ratios gross sales hail of gross sales Cost of gross revenue/ sales SG&A SG&A/gross revenue boodle Income authorize Income/Sales Leverage Ratios chalk up Debt Shares Outstanding Share Price market Value of Equity Debt/D+E EBITDA EBITDA/Sales Interest Expenses EBITDA/Interest $115. 10 58. 50. 57% 21. 4 18. 59% 16. 1 13. 99% 1992 $223. 80 112. 6 50. 31% 43. 4 19. 39% 32. 6 14. 57% 355. 3 98. 6 12 1183. 2 23. 09% 67. 8 30. 29% 6. 5 10. 43 1993 $415. 20 215. 3 51. 86% 85. 3 20. 54% 56 13. 49% 324. 7 102. 6 26 2667. 6 10. 85% 114. 6 27. 60% 14. 6 7. 85 1994 $514. 80 275. 3 53. 48% 119. 7 23. 25% 61. 8 12. 00% 585. 7 103. 7 16 1659. 2 26. 09% 119. 8 23. 27% 16. 5 7. 26 1995 $829. 30 538. 3 64. 91% 231. 3 27. 89% -48. 4 -5. 83% 934. 8 101. 3 12 1215. 6 43. 47% 34. 7 4. 18% 43. 2 0. 80 1996 $581. 20 372. 4 64. 07% 168 28. 90% -27. 9 -4. 0% 977 101. 8 4 407. 2 70. 58% 40. 8 7. 02% 42. 7 0. 96 97. 7 5 488. 5 35. 5 30. 84% 3. 5 10. 14 As we can acquire from the number facts to a higher place, both run(a) and leverage ratios show that bad performance of the connection became even worse after the acquisition. On one hand, during this six-year period, marvels operating ratios decreased greatly Net Income/ Sales dropped from 13. 99% of 1991 to -4. 80% of 1996. Besides, the live of Sales/Sales rose significantly from 50. 57% to 64. 07%. At the uniform time, SG&A/Sales also adjoind from 18. 6% to 28. 9%.On the other hand, the leverage ratios also showed that the leverage is already quite high onward it made the acquisition decision. During the period from 1991 to 1995, the operating results were not satisfying and leverage insurance coverage kept falling. Based on this note, enquires decision makers even so spread out further, resulting in a worse situation after the acquisition, its occupy covera ge ratio dropped rapidly to exclusively 0. 96 the EBITDA/Sales ratio also declined to 7. 02%. therefrom, we can see clearly that the bad strategy wonder adopted is the main reason for its bankruptcy.When approach with both an internal problem monetary distress, and external threatsdeclining demand for cards, wonder should absolutely seek addition within vivacious business instead than impudently spread out through acquiring Skybox. Part 2 Emilitary rating of the proposed restructuring pattern will it calculate the problems that caused admiration to file Chapter 11? As Carl Icahn, the largest unsecured debt holder, would you vote for the proposed restructuring plan? wherefore or why not? In early 1996, Perelman announced a restructuring plan in order to bail out.harmonize to the plan, $365 zillion would be invested in question in exchange for 427 gazillion immature wonderment per centums to maintain the 80% ownership wonderment would acquire spiel Biz, using its revenue to serve admirations debt and jump wonderments NOLs debt with a depend judge of $894. 1 million would conjure into justice. In our perspective, this new plan can only run part of responds recent problems, while it would be helpless to completely help the community out. The proposed restructuring plan is supposed both to sleep responds debt burden and to add-on the liquidity. To achieve this goal, respond planned to accession equity investment, and retire 894. million of debt, whose interest would be secured by 77. 3 million of responds grapples. In these subjects, Marvel would acquire new financing uphold without giving away part of its ownership, which is full of life for the tax and NOLs purpose of the fellowship. Besides, the leverage ratio would decrease sharply as a large proportion of debt would turn into equity, assumption that the market expenditure of channel would not decline significantly. As a result, the plan could solve the liquidity pro blem of Marvel, as well as solve the problem that led Marvel to violate particularised bank loan covenants.However, the fraternity misemployed the impudently acquired liquidity in the legal injury place. alternatively than transforming its original business strategy, which is problematic, into newly emerging industries such as video games to increase revenue, Marvel would maintain its original business lines, majority of which face downturns in the market. At the meantime, Marvel would continue to expand its reliable business by acquiring stay shares of toy dog Biz. As what was mentioned previous in this report, the main reason why Marvel filed Chapter 11 was that it mistakenly bought business that produces non-demanded products.S&P downgraded the companys debt by noting that Marvels earnings have locomote while it has added debt to make acquisitions. To acquire recreate Biz, an estimated $361. 5 million would be remunerative in cash by Marvel. Though Marvel believed that the acquisition would help hold sustainable cash menstruum to the company, we canvass the revenue of bunco Biz, a company which is closely related to Marvels current business lines, is far from guaranteed as a foreseeable downturn in traditional entertainment industry. It means that the alleviated debt burden could be ultimately first-class honours degree by the prudent acquisition.Marvel would be undeniable in crisis. Furthermore, the debt holders, debt of whom would be transformed into equity, would not be fully paid off. after the restructuring plan was announced, the stock footing of Marvel plummeted. From what was shown in Exhibit 3, Marvels stock price act to decline afterwards. Under the downwardly pressure of share price, the care for of the substantiating shares for the puzzles are now much lower than it used to be at the time of the stand bys being issued. In other words, the new shares could now only cover partially the face shelter of original bonds.For Car l Icahn, the largest unsecured debt holder who would have to invest in the highly tax deductioned share once the restructuring plan is passed, whether or not its investment could be paid back would be doubtful. Though Bear Stearns, a company who prepared financial projections for Marvels acquisition of Toy Biz, predicted menial growth for Marvel and significant growth for Toy Biz, and that Marvel was cherishd more as a going concern, the debate of Bear Stearns is questionable and hard to be guaranteed. Therefore, as Carl Icahn, we would not vote for he proposed restructuring plan. Part 3 Evaluation of Marvels equity how much is Marvels equity deserving per share chthonian the proposed restructuring plan assuming it acquires Toy Biz as planned? What is your appraisal of the pro forma financial projections and liquidation assumptions? We go along to estimate equity worth per share by employing the slap-up cash electric current method. keen cash flow valuation in mergeds main ly two approaches starting with NI or starting with EBIT. Concerning the difficulty of ambit for such items as EBIT, we prefer the NI method particularly.Then the whole valuation adjoin could be divided into two split calculation of PV (CCF) and number of shares. Part 1 PV (CCF) How to determine the discount rate is all important(p) for PV (equity take account). This valuation uses data from Exhibit 10. Marvel entertainment group asset genus Beta Risk-free rate Risk grant Pre-tax WACC blood Pre-tax WACC = Rf + ? a * try premium We use the five-year yields on US treasury bills, notes, and bonds for correspondence with our estimation time range starting from 1997 and ending in 2001. It gives us the pretax WACC as 11. 35%, used as our discount rate in the case. Then we proceed to the close slit of CCF, based on reading on Exhibit 9. tabular array 3. 1 has all the calculations shown in explicit paces with our sought after result as equity time take account = 435. 99. Pa rt 2 number of shares expectant Up till now, equity esteem per share is only one measure away with the missing number of shares, which is presented flat underneath Exhibit 6, as 528. 8 Therefore, we can come straightforward to the utmost calculation as Equity pry per share = 435. 99/528. 8 = 0. 2 What makes this case special is that distressed M&A could offer substantial corporate strategy opportunities in the troubled scotch times ahead, while at the same time, the care for of such opportunities could often be hidden amidst the confusion and distress of bankruptcy, such as the one listed as follows. resolution value is presented in table 3. 2. 0. 65 6. 36% 7. 5% 11. 235% Part 4 Will it be difficult for Marvel or other companies in the MacAndrews and Forbes guardianship company to issue debt in the emerging? Yes. It will become much harder for other companies in the MacAndrews and Forbes property company o issue debt in the future, under the influence of Marvels bankruptcy . In 1995, S&P and Moodys downgraded the holding companies debt from B to B-. Again, in 1996, Moodys downgraded Marvels macrocosm debt once more. after the gigantic volume debt of Marvel downgraded by two rating agencies, Marvel had announced that it would violate specific bank loan covenants due to decreasing revenues and profits. Because downgrading of debt increases the endangerment of default, and the default probability would surely bring difficulties to other companies in the MacAndrews and Forbes holding company to issue new debt.This would happen step by step. First, 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. Then, Investors realize this risk and therefore would require a higher(prenominal) default premium to compensate the risk. After that, increase default premiums would raise 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.Some difficulties would be generated from Perelman, because debt holders and creditors where raising questions about the single on the judgment decisions from Perelman. Judge Balick authorise Marvel did not discriminate below the belt 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 tiptoe provided by Perelman. In the end even the Vice-Chairman of the Andrew group had to come with a rehearsal to overcome all the negative sounds in the market.Anyhow it looks like Perelmans reputation was shamed already. Also, this would influence the whole companys reputation and the credibility of issuing new debt. Part 5 Why did the price of Marvels zero-coupo n bonds drop on Tuesday, November 12, 1996? Why did portfolio managers at Fidelity and Putnam sell their bonds on Friday, November 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 he 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. After Marvel met the managers of Fidelity and Putnam, those two institutional investors sell their Marvel bonds on hand immediately in solution of the meeting before the announcement of the restructuring plan. in the national eye(predicate) holders predict Fidelity and Putnam should have the insider information about the restructuring plan.Their action made the public holder feels the restructuring plan is not opt to the bond holder and therefore sold it to avoi d a greater loss. by from that, Marvels zero-coupon bonds were secured by its equity, rather than the companys assets or operating cash flows. Due to the problem Marvel suffered, their share price dropped. Once the stock price dropped below $11. 6 per share, the collateral would not be sufficient to cover the debts. The public debt holders might consider that these bonds were no longer worthy to be held to matureness while the credit risk soared. Therefore they sold the bonds in arge quantity under the deteriorated signals in the market. As a result, the bond price plunged. Due to the restructuring plan, the prices of Marvels shares and bonds dropped 41% and 50% respectively. On Nov 8, 1996, Howard Gittis, debility chairman of Andrews Group, called Fidelity investitures and Putnam Investments, two of the largest institutional holders of Marvels public debt, and asked them what they would like to see in are structuring plan. Portfolio managers at Fidelity and Putnam decided to sel l more that $70 million of Marvel bonds at a price of $0. 37 per long horse of face value on the next day.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 huge losses in diminished value that would have followed and suffer the time they continued to hold the bonds already existing facts were revealed. To explain the portfolio managers at Fidelity and Putnam sell their bonds on Friday, November 8, 1996, we can compare the value of the bond value at the market and the anticipate equity value belong to the public holders after restructuring, Bond value on November 8, 1996, Face value of $894mn X 0. 37per clam of face value = $ 330mn Equity value belong to the public holders after restructuring, $ 77mn shares X $0. 49 (our projected equity worth per share) = $ 38mn We found that the market value of the Marvel bond is far higher than the value of the future equity worth belongs to the bondholders. So, the bond selling price of Fidelity and Putnam is comparatively much attractive rather than the born-again equity value after the restructuring plan. ConclusionIn the above analysis, we reached at the conclusion that Marvels bankruptcy mainly resulted from its bad strategy and management problems. First, it chose to expand in a wrong time and to a wrong direction. Second, its restructuring decision can only solve its liquidity problem temporarily, and Carl Icahn should veto the restructuring plan. Third, Marvel Entertainment Group in this case will have bad influence on other companies and make it hard for them to issue new debt in the future. We also use the capital cash flow method to calculate the equity worth under the restructuring plan.Generally speaking, it does sound that attractive and only resulted in investors chagrin. Table 3. 1 (millions) Net (loss) income + depreciation or amortization change in working capital cap ital expenditure + amortization of goodwill equity in net (loss) income in loose subsidiaries + minority interest in Toy Biz + provision for deferred taxes +Interest Capital cash flow Growth rate of each year Geometric growth rate Discount rate put value of CCF Sum of Present value Debt value of Sept. 996 Equity value ? ? ? termination cash flow = CCF2001 * (1+g)/(r-g) We use geometrical average here because of the convention of thumb the more volatile the return stream, the more important it uses geometric average Because the market value and book value of debt are nearly the same, we directly subtract the debt value from Sum of PV (CCF) to get the final equity value. -7. 12% 11. 235% 248. 21 1412. 99 977. 0 435. 99 192. 3 91. 04 162. 12 118. 67 600. 52 1997 (35. 7) 34. 5 75. 4 83. 0 30. 5 0. 1 3. 0 9. 8 71. 0 271. 6 1998 17. 5 43. 4 11. 5 67. 4 21. 8 0. 2 -8. 3 68. 0 238. 1 (12. 33%) 1999 (12. 1) 44. 1 (44. 3) 47. 4 21. 5 (2. 2) -6. 3 64. 6 125. 3 (47. 38%) 2000 27. 6 44. 8 42. 0 46. 7 21. 2 (3. 2) -8. 1 61. 0 248. 2 98. 08% 2001 33. 6 45. 9 (2. 0) 45. 1 21. 5 (4. 4) -5. 8 56. 6 202. 1 (18. 57%) 1022. 67 Terminal CF 1022. 67 Table 3. Liquidation value Cash Accounts due Inventory Deferred income tax Income tax due Prepaid expenses and other current assets flowing assets PP&E (net) Goodwill and other intangibles (net) Investment in subsidiaries Deferred charges and other assets get assets Accounts account payable Accrued expenses and other current liabilities short-term borrowings live portion of long-term debt Current liabilities Long-term debt Other long-term liabilities Total liabilities Minority interest in Toy Biz Liquidation value Sep-96 35. 9 257. 2 99. 1 32. 5 18. 2 58. 2 501. 1 87. 7 595. 3. 2 72. 7 1260. 4 95. 8 170. 1 28. 7 625. 8 920. 4 0 56. 6 977. 0 102. 9 180. 5 Millions adjustment % 100 85 50 0 100 0 value 35. 9 218. 6 49. 6 0 18. 2 0 322. 3 production line s 1L 2L 3L 4L 50 50 0 0 43. 9 297. 9 0 0 664. 0 5L 6L 7L 7L 90 90 0 0 86. 2 153. 1 0 0 239. 3 8L 8L 9L 9L 0 0 0 0 239. 3 9L 10L 0 0 424. 7 11L 12L tick off all adjustments are based on our groups estimations, prepared from the 1996 standpoint. ? The minute of arc entry accounts receivable is adjusted downward to 85%, based on the rule of thumb of liquidation situations, note (2L), (5L), and (8L) are done likewise.To make it more precise, practiced appraisers are needed for specific consultation. ? Notes (3L), (4L), (7L), (9L), (10L) and (11L) mention the items written down to zero if liquidized. ? Note (6L) were written down to 50% because of the perceived value of Marvels division portfolio (Spiderman and X-man did enable them steal the thunder), while we still need someone expertise for more accurate estimation. ? Lastly, subtracting liabilities from assets in Table 3. 2 gives us the liquidation valuation of $424. 7 million