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Bankruptcy And Restructuring At Marvel Entertainment Group Case Solution

Solution Id Length Case Author Case Publisher
522 2679 Words (6 Pages) Benjamin C. Esty, Jason S. Auerbach Harvard Business School : 298059
This solution includes: A Word File A Word File and An Excel File An Excel File

Several factors led to the financial distress of Marvel. The main problem due to which the company is facing bankruptcy is the issuance of excessive debt. Moreover, the company collateralized this debt against its shares. The debt taken by the company was secured by 77.3 million shares – almost 76% of the total number of outstanding shares. The details of these collateralized shares are provided in exhibit 6 of the case study. These debts were issued by separate holding companies of Marvel and carried high interest. As the company’s profitability declined, it became increasingly difficult to finance the debt. The root cause of the downfall of marvel, therefore, lies in the reasons behind the decline in profitability and issuance of high amount debt.

Following questions are answered in this case study solution:

  1. Why is Marvel in financial distress? Bad luck? Bad strategy? Bad implementation? When possible, back your claims with numbers. 

  2. Why did Marvel file for Chapter 11 rather than restructure out-of-court?

  3. What do different stakeholders of Marvel get under liquidation? What if the firm just continues to operate without restructuring?

  4. Evaluate the (new) restructuring plan. Assuming that the plan is approved, will it solve the problems that caused Marvel to be in financial distress? If yes, how? If not, why not?

  5.  What is your assessment of the pro forma financial projections and liquidation assumptions? What are the different parties incentives to bias the valuation and in what direction?

  6. Does the order in which the holding company and subsidiary go bankrupt have any influence on the expected returns for each stakeholder group?

  7. Why did the price of Marvel’s zero coupon bonds drop on November 12th, 1996? Comment briefly.

  8. What is Icahn’s strategy? Should Icahn vote for the restructuring plan? Why or hay not?

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Bankruptcy and Restructuring at Marvel Entertainment Group Case Analysis

Therefore, the decline in the profitability of the company was not because of a series of unfortunate events as implied by the CEO. The decline in profitability was a result of the bad strategic decisions taken by its acquirer Ron Perelman. The choices made by Perelman created a bomb, which exploded as soon as the company passed the tipping point. The problem was further accentuated by Perelman’s obsession to own 80% stake in the company. It is understood that the majority ownership provided potential tax benefits to Perelman. However, the move not in the best interest of Marvel as it put the company in a dangerous solvency position.

2. Why did Marvel file for Chapter 11 rather than restructure out-of-court?

The bondholders of the holding companies were not satisfied with the restructuring plan proposed by marvel. The bondholders felt that they were not getting a fair deal under the restructuring terms. Perelman’s restructuring bid was believed to be focused around his maintenance of majority stake in the company. For an out-of-court settlement, Perelman needed a unanimous support of all the stakeholders. However, it was clear that some of the stakeholders (predominantly bondholders of holding company debt) were not going to support the restructuring. Therefore, Marvel, under the leadership of Perelman, decided to file for bankruptcy. Under the terms of bankruptcy, Perelman no longer needed the unanimous support for all stakeholders. The required consensus was reduced to a majority support from all classes of stakeholders. The majority constituted 51% of the number of claimants in each class and two-thirds of the total amount held by claimants in each class. Effectively, two-thirds of the bondholders (measured by amount owed) now needed to approve Perelman’s restructuring plan (as opposed to all of them in an out-of-court settlement). Moreover, the judge could still rule in favor of Perelman if he felt that the non-conforming stakeholders’ interests were adequately met through the restructuring plan. Bankruptcy also improved the company’s liquidity position, as it was able to finance $100 million to pay its short-term obligations during the reorganization. Bankruptcy provided the company with a fresh start and protected it from creditors and future litigations.

3. What do different stakeholders of Marvel get under liquidation? What if the firm just continues to operate without restructuring?

According to the liquidation analysis presented in exhibit 7, Marvel could expect to generate about $436 million from liquidation of its assets net of bankruptcy costs. Marvel could also realize some additional proceeds by selling its minority stake in Toy Biz. This would generate total proceeds of about $560 million for Marvel. However, the company had an obligation to pay the debt of $192 million taken by its subsidiary Panini. This left the company with net proceeds of about $369 million for its other creditors. The secured creditors of the company had a priority claim over the liquidated company when compared to the unsecured bondholders. The secured debt of the company amounted to about $535 million. This meant that approximately 69% of the secured debt could be paid with the remaining amount of company’s assets. Therefore, the company’s shareholders and unsecured bondholder would get nothing under a liquidation of the company.

It was highly unlikely that the firm could survive by continuing to operate without restructuring. The company was in a clear risk of default. It had already violated its debt covenants and was not likely to meet its debt obligations in the wake of impending operating losses. The company was in no position to refinance its existing debt by issuing new debt since no lender would be willing to finance the company in its current state. A default of the current debt payments would have invited litigations, and the company would be forced to declare bankruptcy.

4. Evaluate the (new) restructuring plan. Assuming that the plan is approved, will it solve the problems that caused Marvel to be in financial distress? If yes, how? If not, why not?

In a bid to maintain control of the sinking company, Perelman proposed that his company would inject another $365 million in the company for 427 million new shares. The new shares were designed for Perelman to keep majority stake in the new company for tax benefits. The main contention, however, was the price paid for each share of the restructured company. Perelman was paying less than $1 for the shares when the market price of the company was over $2. In fact, when the plan was first proposed, the market price was over $4 before the announcement and dropped by more than $1 following the announcement. The bondholders termed Perelman’s restructuring an ‘unconscionable attempt to maintain control of the company’. Among other components of the plan, Marvel was going to acquire Toy Biz for its high cash flows that can be used to service the high debt payments of the company. The debt of the bondholders, which amount to 894.1 million before the collapse of Marvel, would be converted to 77.3 million equity shares in the restructured company – an equity share of 14.6%.

The bondholders would not get anything out of the company if it is liquidated. In this plan, they are getting a minority stake. However, this stake would only have value of the restructuring plan is able to get the company out of muddy waters. Bear Sterns, the consulting company hired to evaluate the bankruptcy position of Marvel, argues that the company is worth more as a going concern than under liquidation. Therefore, it is logical to assume that bondholder stand to gain more from a restructured company. However, Bear Sterns also concede that the restructured company will be in a dangerous position because of its high debt. Moreover, the consulting company is due to receive $1 million in compensation if the restructuring plan is approved. This is sufficient reason to doubt the objectivity of their statements. The acquisition of Toy Biz seems like a good move as part of the restructuring process. The company might have synergies with Marvel, as it has been closely associated with the company. Furthermore, Marvel is in desperate need of the financial stability that Toy Biz can provide. However, the grand plans for opening of movie studios and theme restaurants produced the same vibe of opening a diverse line of business that had contributed to the downfall of Marvel. It is believed that the company would be better off if it concentrates on its core business after the restructuring – that is production and sale of quality comics at a reasonable price.

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