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APPENDIX

E. Huynink D. Ligtenberg

Valuation & Value Based Management

Bankruptcy and Restructuring at Marvel Entertainment Group
Case Study
Diederik Ligtenberg October, 2008

Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group

Question 1
Why did Marvel file for bankruptcy (Chapter 11)? Were the problems caused by bad luck, bad strategy or bad execution? Although the way Perelman ran Marvel Entertainment Group looked initially brilliant, Marvel had to file for bankruptcy in the end. Was this a matter of bad luck, bad strategy or bad execution? As the demand for comic books strengthened among the collectors, the decision to increase the number monthly titles and their price, caused the opposite of a high growth opportunity. The decision to buy two companies, Fleer and SkyBox, in a ‘collector’ segment, caused a high exposure instead of a healthy diversification as both ‘collector’ businesses began to fade as a result of the less profitable and attractive collecting of comics and trading cards. That is why bad strategy is the main reason for the problems and the eventual filing for Chapter 11. The perception of both businesses as ‘entertainment’, instead of ‘collectors’ made it harder to recognise the influence of a change in strategy which, for example, made the core readers of comics turn away. Especially the acquisition of SkyBox, for a 25% premium, in a declining market segment strengthened the negative effects for Marvel. However, another important factor comes across when looking at these developments. Bad execution, in the form of bad financing, can be seen as another major determinant of the problems. Looking at the debt ratios (table 1 below) in 1995 a significant increase is noticed. Because of the financing of SkyBox, Marvel added $ 190 mn of additional debt. This additional debt forced a major increase in the debt ratio, and as a result also the risk of the company. Downgrades by rating agencies and an advice to restructure its debt were given. The way Marvel choose for a more diversified strategy can be justified. The shift towards two declining businesses, and the way to finance this switch can,

Table 1 Short Term Debt Current portion Long Term Debt Long Term Debt Total Debt Total Equity Debt Ratio

1992 0 35,1 201,2 236,2 84,7 73,6 %

1993 0 45,1 205,1 250,2 147,3 62,9 %

1994 0 20,2 364,1 384,3 243,0 61,3 %

1995 0 5,2 581,3 586,5 207,8 73,8 %

1996 (Q3) 28,7 625,8 0 654,5 180,5 78,4%

Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group however, not be justified. A further increase in its debt ratio did not cause an upset and Marvels ratings were further adjusted downwards.

Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group

Question 2
Evaluate the proposed restructuring plan. • • Will it solve the problems that caused Marvel to file Chapter 11? As Carl Icann, the largest unsecured debtholder, would you vote for the proposed restricting plan? Why or why not? The initial problems at Marvel were caused by bad strategy and bad financing. Although the market tendencies cannot be influenced and are partially irreversible the restructuring plan has to focus on the financial situation and a possible strategic change. The restructuring plan that Perelman proposes could solve the problems of Marvel filing for Chapter 11 partially.

Case Study: Bankruptcy and Restructuring at Marvel Entertainment groupD. Ligtenberg Case Study: Bankruptcy and Restructuring at Marvel Entertainment group

Question 3
How much is Marvel’s equity worth per share under the proposed restricting plan assuming it acquires Toy Biz as planned? What is your assessment of the pro forma financial...
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