Analysis of Bankruptcy and Restructuring at Marvel Entertainment Group
| Case Study
Team 8Anthony BorskiShawn KuehnHeather LuebbersVignesh Veer
Why did Marvel file for Chapter 11? Were the problems caused by bad luck, bad strategy or bad execution?
Marvel filed for Chapter 11 because they couldn’t adequately restructure their debt. In 1996 they got to a point where they were going to violate bank loan covenants and so they needed to restructure their debt. The bond holders wouldn’t agree to the proposed restructuring plan and this led the company to file for bankruptcy.
Marvel first got into trouble because of bad strategy and bad luck. Comic buyers tend to loyal, fanatical and maybe even a bit eccentric. If you change things around on them, you could lose that loyalty very quickly. Also comic books can go in and out of favor in a very cyclical way. Knowing these things, all the changes of prices, titles and styles in 1993 had the potential to be disastrous. And knowing the cyclical nature of the popularity of such things, just because times are good doesn’t mean you should be over spending. You should be putting some money in the bank for when things turn the other way.
In the same way, the trading card market turned then as well. This was partly due to a strike in baseball and partly due to a rise in the popularity of video games. But cards’ popularity is also cyclical.
Despite both of these downturns, Perelman kept on buying, which was a way to get companies cheap, but seriously weakened the company further. And the debt levels became too high.
Evaluate the proposed restructuring plan. Will it resolve the problems that caused Marvel to file for bankruptcy? As Carl Ichan, as the largest unsecured debt holder would you vote for the proposed restructuring? Why or why not?
The proposed restructuring plan involved three parts. Part 1 called for Andrews Group to invest $350 million in Marvel in exchange for 410 million new Marvel shares to ensure it maintained 80% control (Amended plan included investing $365 million in exchange for 427 million shares). Compared to $4.625 the existing day before, these shares would be valued at $0.85. To enable the use of NOL it is necessary that Andrews Group maintains at least 80% control. Although shares would decline in value significantly, it is still better than being worthless under a total liquidation scenario. The second part, states that Marvel will acquire Toy Biz, which makes toys based on Marvel characters. Marvel already owns 26.7% of Toy BIZ and will use cash investment to buy the remaining outstanding shares at a 32% premium and some insider shares at market prices. This is a sensible purchase of Toy Biz because of the close business relationship of these two companies, and because Toy Biz generates approximately $60 million of cash flow per year which can be used to offset more than $100 million of net operating losses. Marvel was becoming an outdated company that provided old-fashioned entertainment in the form of baseball cards and comic books; it was losing customers to competitors who provided entertainment through video games, computers, and TV. This revenue loss was the main driver leading up to the Chapter 11 filing. The purchase of Toy Biz makes sense because it would enable a strong future source of cash flow for the company. This acquisition would further help transform the company into an integrated entertainment and sports content company in all forms of media, print, electronic publishing, toys and games. The third part of the restructuring plan enables public debt holders to exchange their debt with a face value of $894.1 million for equity in the newly recapitalized firm. Debt holders would seize their collateral shares and hold 14.6% (77.3 million shares) of the new shares, which is the equivalent number of shares debt holders held when holding 75.9% of the total...
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