Wednesday, March 6, 2019

Marvel Case

MARVEL ENTERTAINMENT GROUP loser and restructuring Introduction wonder delight theme was started by Martin Goodman in 1939. It in the first place was a comedian allow business, k nown as curiosity Comics now. We claim no way to forget the images of X-men, Spider-Man, and Thor. wonderment Entertainment Group has had a excellent history, and a dominant position in the comic trade. However, this glorious empire regretfully elapsed in the end. The historical rise and hand influences non only if when comic fans life, but most importantly to its graceors and the financial grocery store.Here we discuss in detail more or less the reason marvel wedge for bankruptcy, the evaluation of the restructuring plan, lawfulness expense per share beginning restructuring plan, its influence on the debt rising ability to early(a)wise firms in the assemblage, and why the portfolio managers choose to contend their zero coupon baffles. Part 1 Analyzing problems why did questio n file for Chapter 11? Were the problems ca enforced by poor luck, bad strategy, or bad feat? After taking a deep look into its work of a six-year period, we reached the conclusion that the fall of this comic star is chief(prenominal)ly caused by bad strategy it adopted, especially the one to acquire Skybox.Though the first cardinal issuing of debt did bring along good operating(a) results, reacts issue business began to falter shortly by and by the third issuance. The sales of 3 major business lines Sports and Entertainment Cards, Childrens Activity Stickers, and Published comic books all exasperate significantly by and by 1993. The main reason for this decline can be explained by the fact that child entertainment is change state more diversified, with alternatives appearing such as video games. Besides that, collectors declining willingness to fit out in comic books drive the sales down dramatically.However, these reasons occupy curt things to do with luck because a successful and experienced entertainment connection like wonder should have the ability to nonice this kind of choose change. What is more, adequate market research should also be done when deciding long-term business strategies. But the creator of Spider man sincerely disappointed us by heading for a totally malign direction at the turning point of this industry. To be qualified as a bad strategy adopter, inquire decided to acquire Skybox in 1995. At that time, enquire has a leverage ratio as soaring as 52%, which made it hard to pay back the capacious debt when revenues are declining.Moreover, the declining demand for entertainment cards will make this expanding upon unlikely to boost its revenues. We can involve more intelligibly from its operating and financing ratios that this learnedness resulted in worsened performance of the whole Marvel group. Marvels operating and leverage ratios 1991 Operating Ratios sales speak to of gross revenue Cost of Sales/Sales S G&A SG&A/Sales Net Income Net Income/Sales Leverage Ratios marrow Debt packages Outstanding Share Price Market Value of Equity Debt/D+E EBITDA EBITDA/Sales Interest Expenses EBITDA/Interest $115. 10 58. 50. 57% 21. 4 18. 59% 16. 1 13. 99% 1992 $223. 80 112. 6 50. 31% 43. 4 19. 39% 32. 6 14. 57% 355. 3 98. 6 12 1183. 2 23. 09% 67. 8 30. 29% 6. 5 10. 43 1993 $415. 20 215. 3 51. 86% 85. 3 20. 54% 56 13. 49% 324. 7 102. 6 26 2667. 6 10. 85% 114. 6 27. 60% 14. 6 7. 85 1994 $514. 80 275. 3 53. 48% 119. 7 23. 25% 61. 8 12. 00% 585. 7 103. 7 16 1659. 2 26. 09% 119. 8 23. 27% 16. 5 7. 26 1995 $829. 30 538. 3 64. 91% 231. 3 27. 89% -48. 4 -5. 83% 934. 8 101. 3 12 1215. 6 43. 47% 34. 7 4. 18% 43. 2 0. 80 1996 $581. 20 372. 4 64. 07% 168 28. 90% -27. 9 -4. 0% 977 101. 8 4 407. 2 70. 58% 40. 8 7. 02% 42. 7 0. 96 97. 7 5 488. 5 35. 5 30. 84% 3. 5 10. 14 As we can see from the number facts above, twain operating and leverage ratios show that bad performance of the company became even worse aft erward the acquisition. On one hand, during this six-year period, Marvels operating ratios decreased greatly Net Income/ Sales dropped from 13. 99% of 1991 to -4. 80% of 1996. Besides, the cost of Sales/Sales rose significantly from 50. 57% to 64. 07%. At the same time, SG&A/Sales also growthd from 18. 6% to 28. 9%.On the other hand, the leverage ratios also showed that the leverage is already quite a high before it made the acquisition decision. During the period from 1991 to 1995, the operating results were not satisfying and leverage coverage kept falling. Based on this situation, Marvels decision makers still expanded further, resulting in a worse situation after the acquisition, its interest coverage ratio dropped rapidly to only 0. 96 the EBITDA/Sales ratio also declined to 7. 02%. Therefore, we can see clearly that the bad strategy Marvel adopted is the main reason for its bankruptcy.When liner with both an internal problemfinancial distress, and external threatsdeclining demand for cards, Marvel should absolutely seek growth within existing business quite an than impudently expand through acquiring Skybox. Part 2 military rating of the proposed restructuring plan will it authorize the problems that caused Marvel to file Chapter 11? As Carl Icahn, the largest unsecured debt holder, would you choose for the proposed restructuring plan? Why or why not? In early 1996, Perelman announced a restructuring plan in coif to bail out.According to the plan, $365 zillion would be invested in Marvel in supercede for 427 million new Marvel shares to maintain the 80% ownership Marvel would acquire illumination Biz, using its revenue to serve Marvels debt and offset Marvels NOLs debt with a face cheer of $894. 1 million would shift into equity. In our perspective, this new plan can only ferment function of Marvels recent problems, while it would be helpless to completely help the company out. The proposed restructuring plan is supposed both to relief Marve ls debt payload and to increase the liquidity. To achieve this goal, Marvel planned to increase equity investment, and retire 894. million of debt, whose interest would be secured by 77. 3 million of Marvels shares. In these expressions, Marvel would acquire new financing support without giving away part of its ownership, which is vital for the tax and NOLs purpose of the company. Besides, the leverage ratio would decrease precipitously as a large proportion of debt would turn into equity, given that the market footing of bloodline would not decline significantly. As a result, the plan could solve the liquidity problem of Marvel, as well as solve the problem that led Marvel to violate specific bank lend covenants.However, the company misemployed the newly acquired liquidity in the rail at place. Rather than transforming its pilot film business strategy, which is problematic, into newly emerging industries such as video games to increase revenue, Marvel would maintain its ori ginal business lines, majority of which face downturns in the market. At the meantime, Marvel would continue to expand its authoritative business by acquiring remaining shares of plaything Biz. As what was mentioned previous in this report, the main reason why Marvel filed Chapter 11 was that it mistakenly bought business that produces non-demanded products.S&P downgraded the companys debt by noting that Marvels earnings have fallen while it has added debt to make acquisitions. To acquire Toy Biz, an estimated $361. 5 million would be salaried in bills by Marvel. Though Marvel believed that the acquisition would help generate sustainable currency flow to the company, we numerate the revenue of Toy Biz, a company which is closely related to Marvels current business lines, is far from guaranteed as a foreseeable downturn in traditional entertainment industry. It means that the relieved debt burden could be ultimately offset by the prudent acquisition.Marvel would be indispensab le in crisis. Furthermore, the debt holders, debt of whom would be transformed into equity, would not be fully paid off. After the restructuring plan was announced, the stock price of Marvel plummeted. From what was shown in evidence 3, Marvels stock price keep to decline afterwards. chthonic the downward pressure of share price, the appraise of the collateral shares for the bonds are now much lower than it used to be at the time of the bonds world issued. In other words, the new shares could now only cover partially the face economic value of original bonds.For Carl Icahn, the largest unsecured debt holder who would have to invest in the highly sacked share once the restructuring plan is passed, whether or not its investment could be paid back would be doubtful. Though retain Stearns, a company who prepared financial projections for Marvels acquisition of Toy Biz, signaled modest growth for Marvel and significant growth for Toy Biz, and that Marvel was valued more as a goi ng concern, the line of descent of Bear Stearns is questionable and hard to be guaranteed. Therefore, as Carl Icahn, we would not vote for he proposed restructuring plan. Part 3 Evaluation of Marvels equity how much is Marvels equity outlay per share under the proposed restructuring plan assuming it acquires Toy Biz as planned? What is your mind of the pro forma financial projections and liquidation assumptions? We proceed to estimate equity worth per share by employing the capital cash flow method. Capital cash flow valuation in integrateds in the first place two approaches starting with NI or starting with EBIT. Concerning the difficulty of reaching for such items as EBIT, we prefer the NI method particularly.Then the whole valuation process could be divided into two parts calculation of PV (CCF) and number of shares. Part 1 PV (CCF) How to determine the dissolve rate is crucial for PV (equity value). This valuation uses data from Exhibit 10. Marvel entertainment group asse t beta Risk-free rate Risk tribute Pre-tax WACC Note Pre-tax WACC = Rf + ? a * happen premium We use the five-year yields on US treasury bills, railway lines, and bonds for correspondence with our estimation time range starting from 1997 and ending in 2001. It gives us the pretax WACC as 11. 35%, used as our discount rate in the case. Then we proceed to the next segmentation of CCF, based on information on Exhibit 9. Table 3. 1 has all the calculations shown in explicit treads with our desired result as equity value = 435. 99. Part 2 number of shares outstanding Up till now, equity value per share is only one step away with the missing number of shares, which is opened directly underneath Exhibit 6, as 528. 8 Therefore, we can come straightforward to the final calculation as Equity value per share = 435. 99/528. 8 = 0. 2 What makes this case special is that distressed M&A could offer substantial corporate strategy opportunities in the troubled economic times ahead, while at th e same time, the value of such opportunities could often be hidden amidst the mix-up and distress of bankruptcy, such as the one listed as follows. Liquidation value is presented in table 3. 2. 0. 65 6. 36% 7. 5% 11. 235% Part 4 Will it be difficult for Marvel or other companies in the MacAndrews and Forbes keeping company to issue debt in the coming(prenominal)? Yes. It will bring much harder for other companies in the MacAndrews and Forbes holding company o issue debt in the future, under the influence of Marvels bankruptcy. In 1995, S&P and moodys downgraded the holding companies debt from B to B-. Again, in 1996, Moodys downgraded Marvels existence debt once more. After the grand volume debt of Marvel downgraded by two rating agencies, Marvel had announced that it would violate specific bank loan covenants due to decreasing revenues and profits. Because downgrading of debt increases the possibility of heedlessness, and the default probability would surely bring difficul ties to other companies in the MacAndrews and Forbes holding company to issue new debt.This would happen step by step. First, 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. Then, Investors realize this risk and because would require a higher default premium to compensate the risk. After that, increased default premiums would raise 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.Some difficulties would be generated from Perelman, because 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 challenged the Bearn Sterns conclusions and insinuated Bearn Sterns had multiple levels of conflicts due to the contingency tumble 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 temper was damaged already. Also, this would influence the whole companys reputation and the credibility of issuing new debt. Part 5 Why did the price of Marvels zero-coupon bonds drop on Tuesday, November 12, 1996? Why did portfolio managers at fidelity and Putnam transport their bonds on Friday, November 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 he announcement, Perelman was to purchase, through Perelman-related entities, 410 million shares of newly-issued Marvel common for $0. 85 per share, 81% disco unt to the then prevailing market price of $4. 625. After Marvel met the managers of fidelity and Putnam, those two institutional investors sell their Marvel bonds on hand presently in response of the meeting before the announcement of the restructuring plan. Public holders predict faithfulness and Putnam should have the insider information about the restructuring plan.Their action made the public holder feels the restructuring plan is not favor to the bond holder and therefore sold it to avoid a greater loss. Apart from that, Marvels zero-coupon bonds were secured by its equity, rather than the companys assets or operating cash flows. Due to the problem Marvel suffered, their share price dropped. Once the stock price dropped below $11. 6 per share, the collateral would not be sufficient to cover the debts. The public debt holders might consider that these bonds were no longer magna cum laude to be held to maturity while the credit risk soared. Therefore they sold the bonds in ar ge quantity under the deteriorated signals in the market. As a result, the bond price plunged. Due to the restructuring plan, the prices of Marvels shares and bonds dropped 41% and 50% respectively. 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 are structuring plan. Portfolio managers at Fidelity and Putnam decided to sell more that $70 million of Marvel bonds at a price of $0. 37 per sawhorse of face value on the next day.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 huge losses in diminished value that would have followed and suffer the time they continued to hold the bonds already existing facts were revealed. To explain the portfolio managers at Fidelity and Putn am sell their bonds on Friday, November 8, 1996, we can compare the value of the bond value at the market and the expected equity value belong to the public holders after restructuring, Bond value on November 8, 1996, Face value of $894mn X 0. 37per dollar of face value = $ 330mn Equity value belong to the public holders after restructuring, $ 77mn shares X $0. 49 (our projected equity worth per share) = $ 38mn We found that the market value of the Marvel bond is far higher than the value of the future equity worth belongs to the bondholders. So, the bond selling price of Fidelity and Putnam is relatively much attractive rather than the converted equity value after the restructuring plan. ConclusionIn the above analysis, we reached at the conclusion that Marvels bankruptcy mainly resulted from its bad strategy and management problems. First, it chose to expand in a wrong time and to a wrong direction. Second, its restructuring decision can only solve its liquidity problem temporari ly, and Carl Icahn should veto the restructuring plan. Third, Marvel Entertainment Group in this case will have bad influence on other companies and make it hard for them to issue new debt in the future. We also use the capital cash flow method to calculate the equity worth under the restructuring plan.Generally speaking, it does sound that attractive and only resulted in investors chagrin. Table 3. 1 (millions) Net (loss) income + depreciation or amortization change in functional capital capital expenditure + amortization of goodwill equity in net (loss) income in unconsolidated subsidiaries + minority interest in Toy Biz + provision for deferred taxes +Interest Capital cash flow transcend rate of each year Geometric growth rate implication rate Present value of CCF state of Present value Debt value of Sept. 996 Equity value ? ? ? terminal figure cash flow = CCF2001 * (1+g)/(r-g) We use nonrepresentational average here because of the rule of thumb the more volatile the re turn stream, the more important it uses geometric average Because the market value and book value of debt are nearly the same, we directly subtract the debt value from Sum of PV (CCF) to get the final equity value. -7. 12% 11. 235% 248. 21 1412. 99 977. 0 435. 99 192. 3 91. 04 162. 12 118. 67 600. 52 1997 (35. 7) 34. 5 75. 4 83. 0 30. 5 0. 1 3. 0 9. 8 71. 0 271. 6 1998 17. 5 43. 4 11. 5 67. 4 21. 8 0. 2 -8. 3 68. 0 238. 1 (12. 33%) 1999 (12. 1) 44. 1 (44. 3) 47. 4 21. 5 (2. 2) -6. 3 64. 6 125. 3 (47. 38%) 2000 27. 6 44. 8 42. 0 46. 7 21. 2 (3. 2) -8. 1 61. 0 248. 2 98. 08% 2001 33. 6 45. 9 (2. 0) 45. 1 21. 5 (4. 4) -5. 8 56. 6 202. 1 (18. 57%) 1022. 67 Terminal CF 1022. 67 Table 3. Liquidation value Cash Accounts due Inventory Deferred income tax Income tax receivable Prepaid expenses and other current assets new assets PP&E (net) Goodwill and other intangibles (net) Investment in subsidiaries Deferred charges and other assets Total assets Accounts payable Accrued expenses and oth er current liabilities Short-term borrowings Current portion of long-term debt Current liabilities Long-term debt Other long-term liabilities Total liabilities Minority interest in Toy Biz Liquidation value Sep-96 35. 9 257. 2 99. 1 32. 5 18. 2 58. 2 501. 1 87. 7 595. 3. 2 72. 7 1260. 4 95. 8 170. 1 28. 7 625. 8 920. 4 0 56. 6 977. 0 102. 9 180. 5 Millions adjustment % 100 85 50 0 100 0 value 35. 9 218. 6 49. 6 0 18. 2 0 322. 3 Note s 1L 2L 3L 4L 50 50 0 0 43. 9 297. 9 0 0 664. 0 5L 6L 7L 7L 90 90 0 0 86. 2 153. 1 0 0 239. 3 8L 8L 9L 9L 0 0 0 0 239. 3 9L 10L 0 0 424. 7 11L 12L Note all adjustments are based on our groups estimations, prepared from the 1996 standpoint. ? The second entry accounts receivable is adjusted downward to 85%, based on the rule of thumb of liquidation situations, note (2L), (5L), and (8L) are done likewise.To make it more precise, expert appraisers are needed for specific consultation. ? Notes (3L), (4L), (7L), (9L), (10L) and (11L) identify the items pen d own to zero if liquidized. ? Note (6L) were written down to 50% because of the perceived value of Marvels temperament portfolio (Spiderman and X-man did enable them steal the thunder), while we still need someone expertness for more accurate estimation. ? Lastly, subtracting liabilities from assets in Table 3. 2 gives us the liquidation valuation of $424. 7 million

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