Marvel’s Bankruptcy and Restructuring at Marvel Entertainment
Student’s code Student’s code
Vũ Việt Anh 11200453
Vũ Quý Hưng 11201702
Hoàng Anh Đức 11200837
Đào Đức Anh 11204256
Nguyễn Thế Phúc 11203125
Đỗ Mạnh Thắng 11203531
Nguyễn Ngọc Quang 11206704
1. Are there sound economic reasons for combining different forms of youth
entertainment?
Marvel had, indeed, become a diversified entertainment company. As of year-end
1995, it had six principal lines of business, four of which were approximately equal in size:
1. Sports and Entertainment Cards (22.4% or revenues): sold picture cards depicting
2. professional athletes and other entertainment figures through its Fleer and SkyBox
3. subsidiaries;
4. Toys (21.7% of revenues): designed, manufactured, and distributed children’s toys
based on Marvel characters through its Toy Biz subsidiary;
5. Children’s Activity Stickers (20.7%): sold sports and entertainment stickers
worldwide
6. through its Panini subsidiary;
7. Publishing (17.8%): published comic books;
8. Confectionery (10.9%): manufactured confectionery products—primarily gum;
9. Consumer Products and Licensing (6.4%): licensed characters for merchandise.
Firstly, the diversification is, in theory, supposed to protect Marvel against downturns.
Secondly, by diversifying into different areas of youth entertainment, Marvel aimed to
reduce its reliance on any single market segment. This could mitigate risks associated with
market fluctuations in a specific segment (e.g., comic books or trading cards).
Thirdly, it would help expand market reach since each new segment (toys, stickers,
games) opened up new markets, potentially attracting different customer demographics. This
could lead to an increase in the overall customer base.
2. What is contingent claims?
Contingent claims are financial instruments whose value depends on the specific
conditions or outcomes of uncertain future events. They often appear in the context of options
and derivatives in finance, where returns depend on the performance of an underlying asset.
In Marvel's case, by filing for bankruptcy, Marvel qualified for Debtor-in-Possession
(DIP) financing. Perelman arranged $100 million in DIP financing from Chase Manhattan
Bank to “ensure Marvel has sufficient liquidity to pay all current and anticipated commercial
and employee obligations and meet all operational and investment needs during the
reorganization process.” What is unique about this loan is that it is contingent upon Perelman
remaining in control and would mature immediately in the event of a change of control. This
clause is an example of contingent claims where once Marvel ownership changes, $100
million worth of debt becomes due immediately, putting pressure on the owners. When he
wanted to gain control of Marvel, this scenario demonstrates the contingent nature of the
claim: the value and status of the loan depend on the uncertain future event of whether
Perelman will maintain control of Marvel.
3. Will the restructuring certainly help financially even though most of the
benefits?
If the company goes through restructuring, creditors might be inclined to demand
immediate liquidation of assets. Even in normal circumstances, creditors prefer to be paid in
the present rather than in the future. The risk of losing their investment due to continuously
devaluing assets could make the call for immediate liquidation even stronger. However, our
analysis reveals that if the company is liquidated without restructuring its debt, many
unsecured creditors will receive no payment, and secured creditors will receive only partial
value. There are certain conditions that must be met, though. Firstly, Mr. Perelman must pay
a fair market value for the additional shares, as deeply discounted rates will be seen as unfair
by other stakeholders and will increase their opposition to his plan. Mr. Perelman should not
object to paying more for the shares, as he would not want to be left with worthless shares if
the company goes bankrupt again. Additionally, the proposed restructuring only offers a
temporary solution. The root cause of Marvel's problems lies in its highly-leveraged capital
structure, and the restructuring does nothing to alleviate its debt burden. The debt ratio will
continue to hover around 80% into the future. If Marvel continues with its aggressive buyout
strategy using leveraged stock, it will likely face further bankruptcy problems. Mr. Perelman
should consider divesting some business and product lines.
4. Will the debtholders approve the plan? What did they have before versus what
did they get from the plan? What do they get versus what others get? Whether creditors
believe the plan? What form of consideration did they get?
Face Value Promised Market Price on Collateral Percent Percent of
Issue Interest Rate Shares of Old New
(millions) Shares Shares
10/08/1996 01/31/1997
$517.4 11.25% $0.774 $0.175 48.0d 47.2% 9.1%
$251.7 11875% $0.781 $0.140 20.0 19.6% 3.8%
Marvel
Holdings
senior
secured
discount
notes
Marvel
Parent
Holdings
senior
secured
discount
notes
Marvel III $125.0 9125% $0.899 $0.139 9.3 9.1% 1.8%
Holdings
senior
secured
notes
Total $894.1 77.3 75.9% 14.6%
Before the plan, debt holders had claims against Marvel based on the original terms of their
loans or bonds. These claims represented a right to future cash flows or asset liquidation
proceeds, depending on Marvel's financial performance and solvency. With the restructuring
plan, the nature of their claims would change. The plan proposed converting some of the debt
into equity and involved an injection of new equity by Perelman. This would alter the future
cash flow rights and potentially the ownership structure of the company.
The public debtholders would exchange debt with a face value of $894.1 million for equity in
the newly recapitalized firm. Specifically, they would seize their collateral shares and hold
14.6% (77.3 million shares) of the new shares. In contrast, Marvel Entertainment Group
would repay its secured creditors (consisting primarily of banks) and its unsecured creditors
(consisting primarily of suppliers and employees) in full.Meanwhile, Bear Stearns would
receive a $1 million contingency fee if Perelman’s plan succeeded.
According to standard bankruptcy procedure, Marvel’s management had an exclusive 120-
day period in which to propose a reorganization plan. The bondholders immediately
challenged this provision claiming that Perelman had “a negligible economic interest in
Marvel” because he had pledged the shares to the bondholders as collateral. Given their
ownership of the collateral shares, the bondholders argued that they, not Perelman, should
have the right to propose the first reorganization plan. The bankruptcy court, however,
enforced the automatic stay by rejecting the bondholders’ motion.
The public debtholders would exchange debt with a face value of $894.1 million for equity
in the newly recapitalized firm. Marvel Entertainment Group would repay its secured
creditors (consisting primarily of banks) and its unsecured creditors (consisting primarily of
suppliers and employees) in full.
5. What is the discount rate for capital cash flow valuation?
Assumption:
1. The market risk premium is assumed to be at 5%
2. The cost of equity will be the appropriate discount rate since under conditions of
considerable financial distress debt and equity start becoming equally risky.
Information is taken from 9 months ending 1996 of Exhibit 4 - Marvel’s Balance Sheet
The beta of the asset (Marvel Entertainment 0,65
Group Asset Beta)
Debt 977
Equity 180,5
Rf (Yields on 30-year U.S. Treasury Bills, 6,89%
Notes, and bonds)
Tax rate 40%
Marvel Equity Beta = B(Equity) = B(Asset)*(1+(D/E)*(1-Tax rate))=0.65(1+(977/180,5)*(1-0,4)) =
2.76
*Under conditions of distress the riskiness of debt starts to become equal to the cost of Debt
1. As we incur more and more debt the cost of debt rises and equals the cost of equity
Rd=Re (According to Modigliani and Miller Proposition II)
2. Return on Equity = Rf+B*Market Risk Premium = 6,89%+2,76*5% = 20,69%
3. Cost of capital = Re = 20,69%
6. Isn’t it appropriate to be conservative when making financial projections?
Yes, it is generally appropriate to be conservative when making financial projections,
especially in situations involving uncertainty or financial distress, as in the case of
restructuring or bankruptcy. Conservative financial projections can provide several benefits:
1. Risk Management: Conservative projections take into account potential risks and
uncertainties, providing a more cautious outlook on future performance. This can
prevent over-optimism and ensure that plans are based on realistic expectations.
2. Credibility: Stakeholders such as investors, creditors, and analysts may view
conservative projections as more credible, as they often discount overly optimistic
forecasts.
3. Contingency Planning: By planning for less favorable outcomes, companies can
prepare contingency plans to address potential challenges that may arise, enhancing
their ability to respond to adverse conditions.
In Marvel’s case, Bear Stearns conservatively analyzes 3 scenarios:
1. First, as required under Chapter 11, it prepared a liquidation analysis to show
that Marvel was worth more as a going concern than it would be under a
Chapter 7 liquidation (the “best interests test,” see Exhibit 7). According to the
liquidation scenario, Marvel debtholders (primarily banks) would recover
approximately 70 cents on the dollar while the holding company debtholders
and equity holders would get nothing.
2. Second, Bear Stearns prepared an analysis of Marvel as a going concern without
the Toy Biz acquisition. Bear Stearns estimated that the total enterprise value
was between $520 and $660 million. Given Marvel’s projected net
indebtedness of $725 million as of March 31, 1997, the equity would again be
worthless.
3. Finally, Bear Stearns prepared financial projections for the company as a going
concern assuming Marvel acquired Toy Biz. Perelman’s vision was “to
transform the company into an integrated entertainment and sports content
company prominent in all forms of media, print, electronic publishing, toys,
and games.” In the future, Marvel would operate theme restaurants, own a
movie studio, and produce entertainment software and online applications. The
projections assumed “modest” growth for Marvel and “significant” growth for
Toy Biz due to new media exposure. In addition, the projections assumed that
Marvel would exist as a stand-alone entity filing its own federal and state
income tax returns and that the deal would close on March 31, 1997. Under this
scenario, Marvel’s secured and unsecured creditors would be paid in full.
Through the analysis of Bear Stearns' three scenarios, although the credibility of these
analyses is questioned (a reference to the $1 million contingency fee Bear Stearns
would receive if Perelman’s plan succeeded), caution in analyzing multiple scenarios
should still be taken to have an objective assessment and selection. the best plan.
7. What should the public debtholders do?
(1) accept Perelman’s plan;
(2) sell their bonds for $0.14 to $0.17 per dollar of face value;
(3) vote against the plan in favor of their own version. None of these options is
particularly attractive
The debtholders shouldn’t accept Perelman’s plan as it goes against their interests with
Marvel Entertainment Group. Moreover, it couldn’t be sure that Perelman would be
successful with his plan since the acquisition of Toy Biz can be a bad idea considering the
contemporary market conditions. Giving Andrews Group the ability to maintain 80% control
of Marvel can detrimentally affect the bondholders’ rights to intervene in financial decisions
if things go wrong in the future.
The debtholders also shouldn’t sell their bonds for $0.14 to $0.17 of face value as they will
suffer a significant capital loss compared to the original amount of investing with Marvel’s
bond.
Therefore, it is optimal for the bondholders to vote against the plan in favor of their own
version. At least they will have a chance to change Marvel’s future strategy into a more
reasonable approach than Perelman’s and bring positive price movement to Marvel shares.
