Description

Marvel Enterprises 12% Senior Notes due 6/15/09 are trading in the mid-to-high 60s which is a current yield of about 18% and an over 20% YTM. We think that this is a "money good" piece of paper that has very good risk-return characteristics.

Proforma for a financial reengineering transaction (described below), the capital structure as of 9/30/01 is as follows:
Bank Debt $23mm
Contingent liabilities $12mm
Cash $15mm
Senior notes $156mm (principal)

Taking the debt ahead at par, we value the company through the Senior Notes tranche of the capital structure at approximately $125mm.

BUSINESS - there are essentially 3 segments of the business
1. Licensing - the company licenses its charaters for film and television content (major characters include Spiderman, X-men, Captain America, Fantastic Four and the Hulk). This business generates about $12mm-$14mm in EBITDA per year with no attendant capex. We value this business at about $120mm, which we believe is conservative given that the average content company trades at 12x-15x EBITDA.
2. Publishing - the company sells comic books to retail outlets and direct mail. This is clearly a mature business, but cranks out another $12mm-$14mm in EBITDA per year (again almost no capex). We think this is worth about $100mm in comparing similar private market valuation metrics.
3. Toys - we hate this business. This has clearly been the problem child of the company. However, management is taking the right steps to improve operations here. The company completed a transaction with a foreign contract manufacturer that transfers the vast majority of the company's toy licenses to the foreign manufacturer in return for a variable cost margin on the business. The only toy licenses the company kept is for Lord of the Rings and Spiderman. Lord of the Rings seems to be a comercial success which augurs well for the toys and Spiderman (May '02 scheduled movie release date) should do OK. We believe the ongoing value of the toy business at least covers the cost of corporate segment expenses. Clearly, you could argue for a higher value.

FINANCIAL REENGINEERING:
In the 9/01Q, the company exchanged its Toy Biz worldwide toy action figure and accessories for all the company's characters (except for the ones mentioned about) for $39.2mm face amount of Marvel's Senior Notes for at a $20mm valuation (approx. 51 cents on $). In addition, the company retired $12.2mm face amount of the Senior Notes for $6.7mm in cash. AFTER THE QUARTER ENDED, the company got a new Senior Credit facility including a $20mm 3-year revolver and a 3-year term loan for up to $60mm. The proceeds of the term loan can only be used to purchase the 12% Senior Notes due 2009; the company signed an agreement to buy back $43mm face of the Senior Notes at 53% of face (which is where the $23mm of proforma bank debt comes from in our valuation).

RISKS:
1. Small #'s - poor estimates in EBITDA could spell trouble - although not much debt ahead, which offsets this somewhat.
2. Poor performace of upcoming movies and toys.
3. Deterioration of comic books business.
4. Management?

COMPELLING VALUE:
All told, you're paying about $125mm through the Senior Note tranche at about 5x EBITDA with a 18% current yield and 20% YTM with almost no debt ahead and an asset value of $220mm-plus. We think the risk-return characteristics are compelling.

Catalyst

further financial reengineering
capital structure essentally fixed in our opinion
hot new movies coming out
improved cash flow going forward (alluded to in the most recent bank deal).