Advanced Corporate Finance |
From the Top to the Ground
On December 27, 1996, Marvel and its three primary holdings companies (Marvel Holding Inc., Marvel III Holdings Inc., and Marvel Parent Holdings Inc.) filed for bankruptcy according to Chapter 11 of the United States Bankruptcy Code.
This was thesimplest solution to a financial situation in which Marvel Entertainment wasn’t able to service its debt and to pay its creditors. By September, 1996, the company had a working capital of negative $419.3 million due to the reclassification of $625.8 million from long-term debt to short-term debt. Taking also into account that by the same time Marvel presented a Net Loss of $27.9 million, it wascompletely impossible to achieve the due dates by year end.
Thus, the company had only two choices. The first one was to apply a restructuring plan to finance its debts and try to not violate the bank loan covenants. This is what Ronald Perelman tried to do at first. His restructuring plan consisted in recapitalize the company by investing $365 million in exchange for 427 million newly issuedshares, and in acquiring the remaining shares of Toy Biz, company from which Marvel already owned the 26.7% of total shares. The last step was to exchange public debt holders’ debt for equity in the new share issue. The second choice was, if the restructuring plan didn’t work, to file for bankruptcy. However, when filing for bankruptcy Marvel could follow two different ways, Chapters 7 or 11 of theUnited States Bankruptcy Code. According to Chapter 7 the business has to cease operations and a trustee sells all of its assets, and then distributes the proceeds to its creditors; while only a residual amount is returned to the owners of the company. Nevertheless, in Chapter 11, in most instances, the debtor remains in control of its business operations as a Debtor-in-Possession, and is subject tothe oversight and jurisdiction of the court while trying to apply a restructuring plan. It’s easy to see how this last way gave Perelman the opportunity to try to implement his restructuring plan. That’s why, if filing for bankruptcy, the best choice would be to do it according to Chapter 11.
Despite Perelman tried until the end to implement his restructuring plan, on December 10, 1996, CarlIcahn proposed a different restructuring plan which didn’t include the acquisition of Toy Biz and consisted of a $350 million cash infusion through a rights offering. Given that the disagreement between bondholders and Perelman became evident and far from easy solved, there was no choice than to file for bankruptcy, of course, according to Chapter 11.
We have already analyzed the reasons that movedPerelman to file for bankruptcy and why he did it that way. However, it’s important to realize that the very reason was that Marvel was unable to satisfy its due dates by the year 1996. Then, it’s necessary to analyze now how this problem arose and whose fault was it.
After Ron Perelman bought Marvel in January 1989 the company began to grow so quickly. According to that extraordinary growth(i.e. in its first year at the head of the company Marvel more than doubled its net income, from $2.4 to $5.4 million) he started a new and ambitious project to diversify Marvel by acquiring other companies such as Fleer (July 1992), Toy Biz (March 1993) and Panini Group (July 1994). Moreover, when Marvel’s stock price began to raise Perelman increased his ownership of the company till the 80% inorder to manage tax advantages by incorporating Marvel into the MacAndrews & Forbes holding company.
However, this entire expanding program had also another consequence due to the financing model that Perelman followed. Thus, as we can see in the following chart, the financial structure of Marvel became so leveraged in the span of four years, between 1992 and 1996.
Nothing would have...