October 9, 1997

MARVEL COMICS NEWS

we promised last week that there would be more news from other companies coming from this week's newsletter. It isn't going to happen. Aside from the effort we've put into establishing our daily special sales, and the time it took to prepare for Chuck's departure for the two shows he's doing in Germany, the following news simply took precedence:

MARVEL DEAL FALLS APART

In a stunning turnabout, the agreement reached between the bondholders' groups currently controlling Marvel Entertainment, Inc. (led by Carl Icahn) and the syndicate of banks that hold $816 million in secured Marvel debt (led by Chase Manhattan) has failed to receive approvals from the required two-thirds of the banks in the syndicate. This has led to a state of near total warfare between the banks and the bondholders. The bondholders are desperately seeking to receive permission to inject more working capital into Marvel. The banks are fighting this prevent this, and are instead seeking to have a Chapter 11 trustee appointed. Their rationale is that any new funds injected would supersede their previous loans in priority in the bankruptcy process. Without new funds, however, Marvel is in immediate peril of having to shut down.

Complicating this process even further is a bid by financier Ronald Perelman to regain control of Marvel. Through his partial ownership of Toy Biz, Inc., Perelman is seeking to again merge Marvel into Toy Biz, but at an exchange rate which would greatly benefit the current stockholders of Toy Biz. As a part of this merger, Perelman has offered a sweetened deal to the banks in the form of preferred stock and senior notes from the combined company. It was reportedly this offer which caused some of the smaller banks in the Marvel secured lender syndicate to reject the deal set up by Icahn and Chase.

At this time, the future of Marvel is completely up in the air. The company was pledged operating funds through 10/24 by the secured creditors as a part of the original settlement. Whether these funds will be continued is now in some doubt. Marvel reportedly has some internal cash reserves, but how much these might total is unclear. It does seem clear, however, in the absence of a compromise between the parties, and without the injection of additional operating capital, that Marvel's ability to continue current operations is in doubt.

The one fallback position remains the offer by Chuck Rozanski and Jim Shooter to prepare a bid for the publishing operations of Marvel. Their funding options remain in place, and both are still willing to enter negotiations for the company. But only if some reasonable compromise cannot be reached among the existing parties. The next hearing before Judge Helen Balick of the US Bankruptcy Court is scheduled for Oct. 24.

There is simply no way to sugarcoat these latest developments. It appears that Ron Perelman has suddenly revealed a previously unknown trump card. If he can sway 34% of Marvel's secured lenders into not approving any deal brokered between Icahn and Chase, he suddenly has them both by the proverbial short hairs. Either they bring him back into the deal, or he can force a liquidation. That appears to be his present ploy. How he got more than a third of the banks to not go along with what appeared to be a reasonable settlement is as of yet unknown, but we're skeptical that just the inducement of having preferred stock and senior notes in a Marvel/Toy biz combo was enough to turn the trick. We now believe that Perelman had the potential for killing any deal between Icahn and Chase all along.

While this clever gamesmanship would be somewhat admirable in other contexts, it has put Marvel in a real bind. It is critical, at this point, that a deal be reached that allows the Marvel publishing unit to receive necessary working capital. How this will be accomplished is unknown to us at this time. But we know that the Marvel publishing unit continues to be profitable. Even if a receiver were to be appointed, it would clearly be a gross violation of fiduciary responsibility for the receiver to close down a unit that was generating profits, and operating cash flow, for the benefit of the creditors. But our concerns revolve around the knowledge of the comics world by the receiver. Will he, or she, understand enough about how Marvel is operating to understand that the publishing unit needs uninterrupted output in order to remain viable? We're going to do everything in our ability to attempt to convey that information. More information on this deal as it develops...