1. Why did Marvel file for Chapter 11? Were the problems caused by bad luck, bad strategy, or bad execution? What is the amount of debt of MEG (the operating company) and the Marvel Holding Companies (Marvel owners)?
The Chapter 11 bankruptcy provided an opportunity for all the major stakeholders to evaluate their options regarding their investment and control of Marvel. Bankruptcy alleviated Marvel’s immediate cash shortage, protected it from creditors and some litigation, and provided Marvel with a ‘fresh start.’
Bad strategy: Diversified youth Entertainment Company
Bad execution: Overpaying for acquisitions
There’s a combination of bad strategy and bad execution caused the problem. First, Perelman attempted to “expand the industry pie” and decrease marginal costs, which instead only worked to distract Marvel from producing quality product. Besides, Perelman showed a poor judgment in several acquisitions aimed at building Marvel into an entertainment empire but which only further distracted the company and paid more than he could earn from the acquisitions
At the year 1996, there are more than 70% debts at Marvel entertainment group. The public debts issued by Marvel Holding Companies are 47.2% of the old shares and 9.1% new shares by the time reorganization plan
2. Describe and evaluate the proposed restructuring plan. Will it solve the problems that caused Marvel to file for chapter 11?
The restructure plan:
Buy 410m new shares for $350m @ $0.85
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Acquire remaining Toy Biz with 32% premium
Bondholders get 14.6% of shares (77.3m)
The restructure will allow Marvel to restructure current debt. Also will allow Marvel to sustain operations while they make improvements in the organizational structure and refocused. Marvel will see profits increasing with focus on movie production. However, the restructure plan may only solve part of the problem. Since marvel’s current bonds are valued largely lower, they might only be able to break even by this restructure plan.
3. How do you recommend Marvel debt holders, specifically Marvel’s banks and the public debt holders/investors, to vote for the proposed restructuring plan?
The restructure plan might not be able to truly solve the problem but temporary relief the issue. Marvel needs to catch this opportunity with the newly gained liquidity and flexibility to make correct strategy and management plan. Without changes on the operation side of the company, Marvel could go back to the same result after years.
4. Estimate how much is Marvel’s 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?
The WACC is calculated as an average value. Assume corporate bond return 8.12% (Baa) and the risk premium is assumed 7.5%. The tax rate is also assumed as 35%.
The average growth rate is estimated as the average of the future projected revenue growth rate.
With the WACC and the growth rate, the cash flow is calculated as:
The calculation shows that it’s worth Perelman to buy the new shares since he paid at 0.85 per share
5. Will it be difficult for Marvel or other companies in the MacAndrews and Forbes holding company to issue debt in the future? Why did the price of Marvel’s zero-coupon bonds drop on Tuesday, November 12, 1996? Why did portfolio managers at Fidelity and Putnam sell their bonds on Friday, November 8, 1962?
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The Marvel’s debt has been downgraded from B to B-, which indicates a high risk on the loan. Marvel and other companies will find it is more difficult to issue the new debt in future.
October 8, 1996, Marvel announced that the decreasing revenue and profit would lead to a violation of specific bank loans. After the news, their zero coupon bonds drop on November 12, 1996. It did not meet the expectation of the debt holders and they sold out their debts.
The portfolio managers at Fidelity and Putname sell their bonds because they don’t believe Perelam’s restructure plan will fix Marvel’s issue. They might feel Marvel’s bond was overvalued. So they sold their bonds to minimize their losses. And the downgrade of the bonds was also make is difficult to buy new bonds.
