In December 1996 Marvel Entertainment Group filed for bankruptcy. Marvel came up with a reorganization plan that meant that Perelman, Marvel’s largest shareholder, would invest $365 million in exchange for 427 million newly issued shares. Carl Icahn, one of the main bondholders, did not support this plan. On March 7, 1997, a confirmation hearing was scheduled at which both parties would vote on the proposed reorganization plan.
In this case study, we will first look at why Marvel filed for bankruptcy. Then we will evaluate the proposed restructuring plan and explain why it will not be supported by Carl Icahn. Moreover, we will explain why it will be more difficult for Perelman and his holding companies to issue debt in the future. Furthermore, we will discuss the decline in price of Marvel’s zero-coupon bond in November 1996 and explain why investors sold their Marvel bonds. Finally, we will give an overview of what happened to the company post 1997.
1. Marvel filed for bankruptcy
On October 8, 1996, Marvel announced its default and filed for bankruptcy two month later. The bankruptcy was not caused by one single reason, but rather by a combination of internal and external factors. We will discuss the reasons from the perspective of the market environment, company strategy and execution.
As Marvel’s CEO Scott Sassa concluded, “it was like everything that could go wrong did go wrong”, the change of market environment inevitably influenced Marvel’s business. For years, speculative collectors who viewed comic books as a form of investment were part of Marvel’s most important consumer targets. However, collectors stopped buying in 1994 after failing to realize significant returns. Lacking of these consumers, the sales of comic books declined markedly. At the same time, the trading card market was also impacted by the popularity of professional baseball and hockey. From the case, we can see that in 1995 these two divisions, Sports and Entertainment Cards and Publishing, account for 40.2% of Marvel’s revenue. Therefore, the decrease in sales in these two principle lines must have influenced the total revenue of the company and thus the interest payment of debt.
The market environment change impaired Marvel’s business, whereas it was not the only reason for Marvel to file for bankruptcy. The ill-considered strategy also induced the bankruptcy. For years, Marvel capitalized on speculative frenzy of collectors, increasing the monthly titles and doubling the prices of the comic books. However, Marvel neglected the core value of comic book—the content, indirectly devaluated the comic books for collectors and this led to the loss of the core consumers.
Another strategic mistake lies in its investment decisions. Under some conditions, diversification and consolidation is advantageous in that they allow holding companies to share net operating losses and minimizing tax. However, lacking the consideration of current market environment and corporate financial capability, diversification and consolidation can be disadvantageous. Despite the sales decrease, Perelman continued diversification by acquired SkyBox International Inc., a trade card maker, with a premium of 25% in 1995. Since the market demand for trade card was declining and the future of this industry was uncertain, for a company suffering from sales decline like Marvel, this acquisition was rather risky. Few months after the acquisition, S&P downgraded the company debt from B to B- which reflected the market concern.
Reviewing the company’s financial strategy, we can also find some potential risks. Marvel started its share repurchase to increase ownership by issuing debt. Perelman issued debt for three times in 1993, all debt like margin loans secured by Marvel’s equity. With the stock price trading above $25.00 per share, the 77.3 million shares of collateral had a value of more than 1.9 billion, well above the face value of $894.1...