By Andrew Nusca
Posting in Finance
Walt Disney said that it plans to buy Marvel Entertainment for $4 billion. The deal joins Spider-Man, Iron Man, the Hulk and th eX-Men alongside Mickey Mouse and WALL-E. Here's why the move makes perfect sense.
Walt Disney Co. said on Monday (techmeme) it plans to buy Marvel Entertainment, Inc. for $4 billion in a deal that would add characters such as Spider-Man, Iron Man, the Hulk, the X-Men and the Fantastic Four alongside its own Mickey Mouse, WALL-E and the Pirates of the Caribbean.
Under the deal, Disney will acquire more than 5,000 Marvel characters. The cash and stock deal values Marvel at $50 per share, or a premium of 29 percent to Marvel's closing stock price of $38.65 on Friday.
The deal gives Marvel the financial heft needed to distribute its own films while absorbing any fees Disney's film divisions would have spent to distribute Marvel's successful film franchises.
No doubt, the move is a smart one. The deal rewards Marvel's success in leveraging its characters in extremely successful comic book movie franchises with the financial heft of a major corporation.
How did Marvel reach such heights without the strength of a large organization up to this point? By financing movies itself and hiring studios to release them for a fee. For example, Paramount distributed "Iron Man," while Universal handled "The Incredible Hulk."
Marvel kept all of the profits and naturally retains the lucrative rights for toys and other merchandise based on the films.
Here's a May 2008 BusinessWeek article outlining Marvel's financial acrobatics that helped it run with the big dogs of the movies:
With 2007 revenues of only $486 million from character licensing, toy sales, and comic book publishing, Marvel needed financial heft to run with such big Hollywood studios as Sony and Warner Bros. So the company in 2005 borrowed $525 million to set up an innovative film fund that bankrolled Iron Man and will fund other film projects through 2011.
Marvel managed to raise far more money, with far less risk, than its size would ordinarily fetch.
Marvel now has the financial firepower to bankroll major releases while limiting its risk if a movie tanks. Worst case, Marvel might have to forgo earnings from some of its future films to cover losses and replenish the movie fund.
Marvel drew down about $150 million from the film fund to make Iron Man and is paying Paramount Pictures (VIA) 10% of net revenues from ticket and video sales on top of its fees for marketing and distribution. Still, Iron Man could generate $1 billion in box-office, home-video, and other sales. And profits (less expenses) could be nearly $200 million, projects analyst Alan S. Gould of brokerage house Natisix Bleichroeder.
(Iron Man ended up being a smash hit for the company.)
For Disney, the deal brings extremely successful franchises to its portfolio (the three "Spider-Man" films have generated $2.5 billion in worldwide box-office receipts, while four "X-Men" movies have grabbed about $1.6 billion), and adds a decidedly older demographic to its portfolio without tarnishing the company's namesake properties.
For Marvel, it gives the company in-house film distribution as well as stronger standing against rival DC Comics, which is owned by corporate conglomerate Time Warner Inc.
(Time Warner owns New Line Cinema, AOL, Cartoon Network, HBO, TBS and CNN among others. The Walt Disney Co. owns Disney properties as well as ABC, ESPN and several film studios, including Touchstone, Miramax, DreamWorks and Buena Vista.)
The only downside? That Marvel can no longer shield itself from risk if a film flops, a result that may be more likely now that the "comic book movie" craze has winded down.
Marvel's shares skyrocketed to $48.86 in early morning trading, up more than 10 percent. Shares of Disney dropped about one half percent in early trading.
Marvel shareholders would receive a total of $30 per share in cash plus approximately 0.745 Disney shares for each Marvel share they own.
Aug 30, 2009