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The Strangely deep-value story at the heart of the Marvel empire

The contrarian approach to investing that helped Marvel evolve from struggling comic-book business to cinematic superpower is worthy of one of the franchise’s characters – Dr Strange

22/08/2018

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

Nobody can predict the future – as we never tire of pointing out, here on The Value Perspective – but that does not stop us enjoying the exploits of Marvel superhero Dr Strange, one of whose powers is clairvoyance.

And before you suggest it is perhaps a bit obvious for professional investors to zone in on that particular superpower, we should stress it is the way the good doctor goes about telling the future that really appeals.

That is because he assesses the future in terms of probabilities – an approach we have discussed recently in articles such as No regrets and 2015 Super Bowl.

The ultimate illustration of this comes at the end of the latest instalment in Marvels’ ‘Avengers’ movie franchise, Infinity War, when Dr Strange takes a hugely contrarian decision (another of his qualities we of course admire, here on The Value Perspective).

Without venturing too deeply into spoiler territory, suffice to say that while battling arch villain Thanos with a number of his Avenger colleagues, Dr Strange weighs up more than 14 million different versions of the future and opts for a course of action that ends up making a serious dent in the cast list – presumably because it is the only path that ultimately leads to a happy ending.

Time – and future movies – will tell.

The fall and rise of Marvel

As it happens, the spirit of Dr Strange is very much in evidence in the history of Marvel itself, which is entertainingly chronicled by Dan Raviv in his 2004 book, Comic Wars: Marvel’s Battle For Survival. Hard as it may be to believe, now that every second film release seems to involve one or more of its stable of superheroes, the Marvel business was not always in such robust health.

Indeed, in the 1980s, it was looking positively green – and not in a good, Incredible Hulk-like way.

Losing ground to its arch rival DC Comics, Marvel passed through various hands before ending up in the hands of billionaire US investor Ron Perelman. In 1991, as was the practice of the time, Perelman took the company public before loading it up with junk bond debt with a view to making further acquisitions.

Global appetite for comics and comic-book characters was a fraction of what it is today, however, and the business floundered before filing for bankruptcy in 1996.

There followed a protracted legal battle between Perelman, another high-profile US corporate raider, Carl Icahn, and two much less well-known Israeli businessmen – Isaac Perlmutter and Avi Arad.

The co-owners of Toy Biz, which had the licence to manufacture Marvel character toys, Perlmutter and Arad were convinced there was a huge store of value in the licensing and franchise aspects of the Marvel business.

As an example, they estimated Spiderman alone could be worth as much $1bn (£780m) – even back in the mid-1990s – and so set about backing this view with their own money.

Having seen off Perelman and Icahn – no mean feat in itself – Perlmutter and Arad needed to do something about the poor health of the Marvel balance sheet. The interest payments on the $250m-worth of bond debt were consuming pretty much all of the business’s profits and cashflow, which aside from anything else was seriously compromising any chance of any sort of movie project.

A contrarian decision 

In the spirit of Dr Strange, Perlmutter and Arad assessed their options and decided their best course of action was the deeply contrarian step of buying the outstanding debt, which was trading at some 50 cents on the dollar – that is, half the price at which it had been issued.

The pair took out a large loan with HSBC – secured on their personal guarantee, plus a lot of cheap warrants on Marvel shares – and the rest is history.

A cinematic superpower was born that enabled Perlmutter and Arad to unlock the huge amounts of value they were convinced lay in many of the Marvel characters.

And the recovery story was completed in 2009 when Walt Disney bought the business for around $50 a share – 15 or so years earlier, remember, the stock had been worthless – making billionaires of the Strangely contrarian Perlmutter and Arad.

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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