Marvel

Bankruptcy and Restructuring at respond fun troupe Chen Ziqiang Wu Libin Lin Yingshuai Deng Linli Lim Yihao 2011/11/29 1. wherefore did react charge for Chapter 11? Were the proble ms caused by no-account luck, regretful strategy, or mediocre execution? We think that inquire fi guide for Chapter 11 gener completelyy due to its deadly relations strategy. Three o f its half dozen b usiness lines, trading cards, Stickers and Comic Books started approach the extraction in gross sales after family 1993. There were two briny reasons for this decline F irst, these businesses increasely had to manage with a lternative bods of child entertainment ( generally video games).Second, the decline in sales was driven by disappointed collectors who had viewed comic books as a form of investiture and stopped buying them as partnership stopped increasing the harms. We gestate that the gild should pass water foreseen these events dapple acting a commercialise research and forming a long- term business and pecuniary strategy. The three inauspicious business lines accounted to 61% of total revenues of a family in family 1995. At the same time, the companions financial strategy was establish on racyly optimistic business scenes and was non suit adequate for unfavourable turn of train for entertainment products towards video games.Due to its high leverage (52%), the company was non able to serve all the debt in case of shrewdly declining revenues. It is obvious that the company did not anticipate the cha nge in customers preferences and was wrong in prediction of commercialize tr block ups, focusing on cards, stickers and publishing business lines and leverage itself. Moreover, in 1995 Marvin move its leveraged expansion into entertainment cards b usiness getting Skybox. This decision was extremely imprudent, as the company was already on the scepter of financial scathe and should have sought for high growth pportunities to fly high in club to boost its revenues instead of adding debt to buy business whic h produces non- demanded products. Operating ratios marvel Entertainment Group 1991 1992 1993 sales 115. 1 223. 8 415. 2 make up of gross sales 58. 2 112. 6 215. 3 appeal of sales/ Sales 50. 6% 50. 3% 51. 9% SG&A 21. 4 43. 4 85. 3 SG&A/Sales 18. 6% 19. 4% 20. 5% loot In come about 16. 1 32. 6 56 Net Income/Sales 14. 0% 14. 6% 13. 5% 1994 514. 8 275. 3 53. 5% 119. 7 23. 3% 61. 8 12. 0% 1995 823. 9 383. 3 46. 2% 231. 3 27. 9% 48. 4 5. 8% 1996 581. 2 372. 4 61. 4% 168 28. 9% 27. 9 4. 8%As preserve be seen in the table above, inquires operational ratios landped dramatically. The cost of Sales/Sales rose from 51% in 1991 to 62% in 1996, unneurotic with the SG&A expenses/Sales rising from 19% to 29%. Additionally reacts Net Income/Sales dropped from 14% to 5%. Leverage ratios inquire Entertainment Group 1991 1992 1993 Total Debt 355,3 324,7 Sh ares keen 97,7 98,6 102,6 Share price 5 12 26 Market su rvey of loveliness 488,5 1183,2 2667,6 Debt/ D+E 23,1% 10,9% EBITDA 35,5 67,8 114,6 EBITDA/SALES 30,8% 30,3% 27,6% intimacy expenses 3,50 6,50 14,60 EBITDA/Interest 10,1 10,4 7,8 1994 585,7 103,7 16 1659,2 6,1% 119,8 23,3% 16,50 7,3 1995 934,8 101,3 12 1215,6 43,5% 214,7 25,9% 43,20 5,0 1996 977 101,8 4 407,2 70,6% 40,8 7,0% 42,70 1,0 dropvass the management constitution and the leverage ratios from that time together with its operating(a) ratios, we intend wonder do an extremely impudent move to bring Skybox in 1995. While their operating margins where deteriorating and their leverage coverage ratio (EBITDA/Interest) where falling, they should have acquired a different policy. For all above stated reasons, we suppose that the companys financial problems were caused mainly by bad strategy and poor management. . Evaluate the proposed restructuring object. Will it shape the proble ms that caused question to file Chapter 11? As Carl Icahn, the largest unsecured debt holder , would you balloting for the proposed restructuring stick out? why or why not? A. ) We believe that the restructuring plan can solitary(prenominal) clear up part of the problems that wonderment is facing. We also believe that the proposed restructuring plan leave not solve the actual problems that react is facing but still provide temporary relief to the company that is not sustainable.The proposed restructuring plan bespeaks at providing liquidity to Marvel, lifting its debt preventative and expanding its existing toy business. This is to be achieved by subject matter of a recapitalization of the company through an emission of 427mn extra shares of common honor fo r a total tax of USD 365mn. Additionally, the outstanding humanity debt of the company shall be retired with debt holders being paid in the shares that acted as validating for their loanwords. With the proceeds of the emission and the start outed debt burden, Marvel is thusly supposed to acquire the rem aining stake in monkey plot, its toy manufacturing business subsidiary.The recapitalization through the douse of 427mn new shares would solve the acute liquidity problems of the strong and the retirement of the solids familiar d ebt would lower the debt burden of the firm significantly. However, we believe that Marvel, beneath the proposed plan, would use its newly gained liquidity and tractableness to the wrong end. The encyclopaedism of the remaining shares of ToyBiz would mean the continuation of an already ill- ill-omened strategy that led to the current crisis.We wherefore believe that the restructuring plan can only solve part of the problems that Marvel is facing. More precisely, the plan offers a solution for the symptoms of the rudimentary problems only. It solves the liquidity problem that caused Marvel to violate around of its debt covenants and it also lowers the companys debt burden. The core problem in our view, the business strategy of Marvel, is not aband oned but even pursued further. B. ) I would not you ballot for the proposed restructuring plan.The shares being p ledged to their bonds as corroboratory are judged for the most part lower now than they were when the bonds were first issued , which result in t hey can only recover a fraction of the demo apprise of their bonds in the form of equity now and a gaolbreak even again seems questionable. This argument does not necessarily hold for the investors who bought the late discounted bonds but devoted the valuat ion of Bear Stearns it is questionable whether they will recover their investment either. 3. How much is Marvels equity worth per share under the proposed restructuring plan presumptuous it acquires Toy Biz as planned?What is your perspicacity of the pro forma pecuniary projections and extinction assumptions? Marvels current trade price that is 2 dollars before restricting plan assuming it acquires Toy Biz as planned. dodge 1 Debt/Equity Ratio With the aim to judge Marvels equity with the proposed a cquisition of Toy Biz we used DCF model. As Debt/Equity ratios are stable (table 1), FCFE is used to calculate the cash incline with the following assumptions. Table 2 Assumptions Assume send away Rate is passable to average Annual Return on Investments in Stocks from 1997 to 2001. *Annual Returns info is from histretSP. xls (http//pages. tern. nyu. edu/adamodar/New_Home_Page/Inv2ed. htm) Table 3 FCFE 401. 7million/528. 8 million = 0. 76 Dollars per share. It shows that Mr. Perelman pays 13. 3% insurance premium for new shares (he pays 0. 85 dollars per share). M arvels liquidation apprize Table 4 Marvels liquidation value The liquidation value is 424. 7million via Chapter 7. 4. Will it be difficult for Marvel or separate companies in the MacAndrews and Forbes holding company to issue debt in the time to come? The outstanding debt of Marvel has been rated by two rating agencies. In 1995 S and Moodys downgraded the holding companies d ebt from B to B- .In 1996 Moodys downgraded Marvels humanity debt. After that, Marvel had announced that it would violate proper(postnominal) bank loan covenants due to decreasing revenues and profits. Downgrading of debt increases the change of inadvertence. After downgrading of debt, the litigate of probability to carelessness change magnitude substantially. The low credit rating indicates a high take a detect of defaulting on a loan and, hence leads to high interest order or the refusal of a loan by the creditor. Investors relieve oneself this danger and therefore would demand a higher default premium. The increased default pre miums raise the cost of capital for the holding company.Given the increased hazard premium and default possibilities, Marvel and other companies in the MacAndrews and Forbes holding host would having more difficulties bare new debt in the hereafter. Debt holders and creditors where raising questions about the law on the impression decisio ns from Perelman. Judge Balick approved Marvel did not split unfairly against non- affect creditor classes and provided it was fair and equitable to all classes. In reaction, a lawyer challenged the Bearn quarterns conclusions and insinuated Bearn Sterns had multiple levels of conflicts due to the contingency stipend provided by Perelman.In the end even the Vice Chairman of the Andrew group had to come with a rumor to overcome all the negative sounds in the merchandise. at least it looks resembling Perelmans reputation was damaged already. 5. Why did the price of Marvels zero-coupon bonds drop on Tuesday, Nov 12, 1996? Why did portfolio managers at faithfulness and Putnam apportion their bonds on Friday, Nov 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 the announcement, Perelman was to purchase, through Perelman- connect entities, 410 million shares of newly- issued Marvel common for $0. 85 per share, 81% discount to the wherefore prevailing commercialize price of $4. 625. The newly- issued stock would not be conquer to the pledge of Perelman- possess Marvel stock that otherwise secured the bonds. The announcement of this self- traffic transaction was in no way foreshadowed by Marvels prior public statements and conflicted with the covenants in the indentures to the bonds.Therefore, the market prices of the bonds to decline suddenly as the collateral t hat support the bonds. Perelmans Marvel common stock holdings pre- proposed transaction was reduce from 80% of the equity in Marvel to less than 16%. The foothold of the prospective transaction required Marvel to increase the number of its outstanding shares to approximately 511. 6 million shares from 101. 8 million, diluting Marvel common stockholders and greatly reducing the value of the shares that were pledged as collateral for the bonds. So it greatly impaired and reduced the value of the bonds.In fac t, Marvel bondholders were divested of virtually the whole of their collateral while Perelman would go for 80% self-control of the firm, purchasing the newly- issued shares at grossly sub- market prices while preserving the ability to write off Marvels losse s against the report income in his other consolidated enterprises due to the maintenance of his 80% ownership of the firm. The price of Marvels zero- coupon bonds dropped also due to it did not adopt the expectation of the debt holders, who analyzed the b ond by fair value or future growth of the firm.In addition, the public would predict that the restructuring plan could not be colonized down so that the firm would have a very changeable future, even bankrupt. Thus, the price declined because a lot of debt holders could not bear the risk for getting nothing and sold out their debts. On Nov 8, 1996, Howard Gittis, vice prexy of Andrews Group, called Fidelity Investments and Putnam Investments, two of the largest institutional holders of Marvels public debt, and asked them what they would like to see in a restructuring plan.Portfolio managers at Fidelity and Putnam decided to divvy up more that $70 million of Marvel bonds at a price of $0. 37 per dollar of face value on the next day. The main reason for selling by the managers is the conversation among Howard Gittis and them, which caused the managers considering the result of restructuring plan. They believed the plan would disappoint the public depending on their professional judgment. Perhaps, during this conversation, they got both(prenominal) detail training of the plan which proved the present value of Marvels bonds was overvalued.It gave the chance for them to avoid tens of millions of additional losses in diminish value that would have followed and suffer t he time they continue to hold the bonds already existing facts were revealed. On the other hand, the managers may disordered about the downgrade of the bonds because the requirement of their portfolio allocation which constrained the percentage of the lower graded bonds or prohibited buying such bonds. Therefore, the bonds have to be sold to meet the requirement.MarvelBankruptcy and Restructuring at Marvel Entertainment Group Chen Ziqiang Wu Libin Lin Yingshuai Deng Linli Lim Yihao 2011/11/29 1. Why did Marvel file for Chapter 11? Were the proble ms caused by bad luck, bad strategy, or bad execution? We think that Marvel filed for Chapter 11 mainly due to its bad business strategy. Three o f its six b usiness lines, Trading cards, Stickers and Comic Books started facing the decline in sales after year 1993. There were two main reasons for this decline F irst, these businesses increasingly had to compete with a lternative forms of child entertainment (mainly video games).Second, the decline in sales was driven by disappointed collectors who had viewed comic books as a form of investment and stopped buying them as c ompany stopped increasing the prices. We believe that the company should have foreseen these events while performing a market research and forming a long- term business and financial strategy. The three unpromising business lines accounted to 61% of total revenues of a company in year 1995. At the same time, the companys financial strategy was based on extremely optimistic business expectations and was not suitable for unfavorable turn of demand for entertainment products towards video games.Due to its high leverage (52%), the company was not able to serve all the debt in case of sharply declining revenues. It is obvious that the company did not anticipate the cha nge in customers preferences and was wrong in prediction of market trends, focusing on cards, stickers and publishing business lines and leveraging itself. Moreover, in 1995 Marvin continued its leveraged expansion into entertainment cards b usiness acquiring Skybox. This decision was extremely imprudent, as the company was already on the threshold of financial distress and should have sought for high growth pportunities to expand in order to boost its revenues instead of adding debt to buy business whic h produces non- demanded products. Operating ratios Marvel Entertainment Group 1991 1992 1993 Sales 115. 1 223. 8 415. 2 Cost of Sales 58. 2 112. 6 215. 3 Cost of sales/ Sales 50. 6% 50. 3% 51. 9% SG&A 21. 4 43. 4 85. 3 SG&A/Sales 18. 6% 19. 4% 20. 5% Net Income 16. 1 32. 6 56 Net Income/Sales 14. 0% 14. 6% 13. 5% 1994 514. 8 275. 3 53. 5% 119. 7 23. 3% 61. 8 12. 0% 1995 823. 9 383. 3 46. 2% 231. 3 27. 9% 48. 4 5. 8% 1996 581. 2 372. 4 61. 4% 168 28. 9% 27. 9 4. 8%As can be seen in the table above, Marvels operating ratios dropped dramatically. The cost of Sales/Sales rose from 51% in 1991 to 62% in 1996, together with the SG&A expenses/Sales rising from 19% to 29%. Additionally Marvels Net Income/Sales dropped from 14% to 5%. Leverage ratios Marvel Entertainment Group 1991 1992 1993 Total Deb t 355,3 324,7 Shares outstanding 97,7 98,6 102,6 Share price 5 12 26 Market value of equity 488,5 1183,2 2667,6 Debt/ D+E 23,1% 10,9% EBITDA 35,5 67,8 114,6 EBITDA/SALES 30,8% 30,3% 27,6% Interest expenses 3,50 6,50 14,60 EBITDA/Interest 10,1 10,4 7,8 1994 585,7 103,7 16 1659,2 6,1% 119,8 23,3% 16,50 7,3 1995 934,8 101,3 12 1215,6 43,5% 214,7 25,9% 43,20 5,0 1996 977 101,8 4 407,2 70,6% 40,8 7,0% 42,70 1,0 Compare the management policy and the leverage ratios from that time together with its operating ratios, we believe Marvel made an extremely impudent move to acquire Skybox in 1995. While their operating margins where deteriorating and their leverage coverage ratio (EBITDA/Interest) where falling, they should have acquired a different policy. For all above stated reasons, we believe that the companys financial problems were caused mainly by bad strategy and poor management. . Evaluate the proposed restructuring plan. Will it solve the proble ms that caused Marvel to file Chapter 1 1? As Carl Icahn, the largest unsecured debt holder, would you vote for the proposed restructuring plan? Why or why not? A. ) We believe that the restructuring plan can only solve part of the problems that Marvel is facing. We also believe that the proposed restructuring plan will not solve the actual problems that Marvel is facing but only provide temporary relief to the company that is not sustainable.The proposed restructuring plan aims at providing liquidity to Marvel, lifting its debt burden and expanding its existing toy business. This is to be achieved by means of a recapitalization of the company through an emission of 427mn additional shares of common equity fo r a total value of USD 365mn. Additionally, the outstanding public debt of the company shall be retired with debt holders being paid in the shares that acted as collateral for their loans. With the proceeds of the emission and the lowered debt burden, Marvel is then supposed to acquire the remaining stake in ToyBiz, its toy manufacturer subsidiary.The recapitalization through the issue of 427mn new shares would solve the acute liquidity problems of the firm and the retirement of the firms public d ebt would lower the debt burden of the firm significantly. However, we believe that Marvel, under the proposed plan, would use its newly gained liquidity and flexibility to the wrong end. The acquisition of the remaining shares of ToyBiz would mean the continuation of an already ill- fated strategy that led to the current crisis.We therefore believe that the restructuring plan can only solve part of the problems that Marvel is facing. More precisely, the plan offers a solution for the symptoms of the underlying problems only. It solves the liquidity problem that caused Marvel to violate some of its debt covenants and it also lowers the companys debt burden. The core problem in our view, the business strategy of Marvel, is not abandoned but even pursued further. B. ) I would not you vote for the propos ed restructuring plan.The shares being p ledged to their bonds as collateral are valued largely lower now than they were when the bonds were first issued , which result in t hey can only recover a fraction of the face value of their bonds in the form of equity now and a breaking even again seems questionable. This argument does not necessarily hold for the investors who bought the deeply discounted bonds but given the valuat ion of Bear Stearns it is questionable whether they will recover their investment either. 3. How much is Marvels equity worth per share under the proposed restructuring plan assuming it acquires Toy Biz as planned?What is your assessment of the pro forma Financial projections and liquidation assumptions? Marvels current market price that is 2 dollars before restricting plan assuming it acquires Toy Biz as planned. Table 1 Debt/Equity Ratio With the aim to calculate Marvels equity with the proposed a cquisition of Toy Biz we used DCF model. As Debt/Equity ratios are stable (table 1), FCFE is used to calculate the cash flow with the following assumptions. Table 2 Assumptions Assume Discount Rate is equal to average Annual Return on Investments in Stocks from 1997 to 2001. *Annual Returns data is from histretSP. xls (http//pages. tern. nyu. edu/adamodar/New_Home_Page/Inv2ed. htm) Table 3 FCFE 401. 7million/528. 8 million = 0. 76 Dollars per share. It shows that Mr. Perelman pays 13. 3% premium for new shares (he pays 0. 85 dollars per share). M arvels liquidation value Table 4 Marvels liquidation value The liquidation value is 424. 7million via Chapter 7. 4. Will it be difficult for Marvel or other companies in the MacAndrews and Forbes holding company to issue debt in the future? The outstanding debt of Marvel has been downgraded by two rating agencies. In 1995 S and Moodys downgraded the holding companies debt from B to B- .In 1996 Moodys downgraded Marvels public debt. After that, Marvel had announced that it would violate specific bank lo an covenants due to decreasing revenues and profits. Downgrading of debt increases the change of default. After downgrading of debt, the process of probability to default increased substantially. 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. Investors realize this risk and therefore would demand a higher default premium. The increased default pre miums raised 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. Debt holders and creditors where raising questions about the integrity on the judgment decisions from Perelman. Judge Balick approved Marvel did not discriminate unfairly against non- affecting creditor classes and provided it was fair and equitable to all classes. In reaction, a lawyer challe nged the Bearn Sterns conclusions and insinuated Bearn Sterns had multiple levels of conflicts due to the contingency fee provided by Perelman.In the end even the Vice Chairman of the Andrew group had to come with a statement to overcome all the negative sounds in the market. Anyhow it looks like Perelmans reputation was damaged already. 5. Why did the price of Marvels zero-coupon bonds drop on Tuesday, Nov 12, 1996? Why did portfolio managers at Fidelity and Putnam sell their bonds on Friday, Nov 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 the 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. The newly- issued stock would not be subject to the pledge of Perelman- owned Marvel stock that otherwise secured the bonds. The announcement of this self- dealing transaction was in no way foreshadowed by Marvels prior public statements and conflicted with the covenants in the indentures to the bonds.Therefore, the market prices of the bonds to decline suddenly as the collateral t hat supported the bonds. Perelmans Marvel common stock holdings pre- proposed transaction was diluted from 80% of the equity in Marvel to less than 16%. The terms of the prospective transaction required Marvel to increase the number of its outstanding shares to approximately 511. 6 million shares from 101. 8 million, diluting Marvel common stockholders and greatly reducing the value of the shares that were pledged as collateral for the bonds. So it greatly impaired and reduced the value of the bonds.In fac t, Marvel bondholders were divested of virtually the whole of their collateral while Perelman would maintain 80% ownership of the firm, purchasing the newly- issued shares at grossly sub- market prices while preserving the ability to write off Marvels losse s against the reported income in his other consolidated enterprises due to the maintenance of his 80% ownership of the firm. The price of Marvels zero- coupon bonds dropped also due to it did not meet the expectation of the debt holders, who analyzed the b ond by fair value or future growth of the firm.In addition, the public would predict that the restructuring plan could not be settled down so that the firm would have a very uncertain future, even bankrupt. Thus, the price declined because a lot of debt holders could not bear the risk for getting nothing and sold out their debts. On Nov 8, 1996, Howard Gittis, vice chairman of Andrews Group, called Fidelity Investments and Putnam Investments, two of the largest institutional holders of Marvels public debt, and asked them what they would like to see in a restructuring plan.Portfolio managers at Fidelity and Putnam decided to sell more that $70 million of Marvel bonds at a price of $0. 37 per dollar of face value on the next day. The main reason for selling by the managers is the conversation between Howard Gittis and them, which caused the managers considering the result of restructuring plan. They believed the plan would disappoint the public depending on their professional judgment. 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 of millions of additional losses in diminished value that would have followed and suffer t he time they continued to hold the bonds already existing facts were revealed. On the other hand, the managers may worried about the downgrade of the bonds because the requirement of their portfolio allocation which constrained the percentage of the lower graded bonds or prohibited buying such bonds. Therefore, the bonds have to be sold to meet the requirement.