Team Rodent Eats Spidey!

Walt Disney Co. (aka Team Rodent) has announced its acquisition of Marvel Entertainment Inc. this morning in a deal that values the comic book powerhouse at $50 share, a 30% premium over Friday's close. After changing its Depends, CNBC has been streaming non-stop segments covering the purchase like Burma Shave billboards along the highway, and every talking head is providing perspective as if from the top of the Magic Castle in Anaheim. That is, the Disney View is the only view that offered to the public. A quick analysis of Disney's holdings and history would tell an eighth-grader why they wanted to buy. The more intelligent question is, "why did Marvel want to sell?" With the economy in rebound and consumer spending on the rise, a 30% premium seems downright cheap for MVL, so why bail out now?

I can think of four possible reasons:

Isaac ("Ike") Perlmutter, the CEO of Marvel, is ready to cash out and retire. He's 66 years old and been in business as a restructuring expert for decades. He acquired a bankrupt Marvel in 1998 and over 10 years, has increased share value from $7.69 to $33.87 - an increase of 440% ex-Disney (676% including the Mouse). Buying collapsed companies and bringing them back to life requires tremendous stamina, and he doesn't get much love from the board of directors. His base salary is a paltry $700,000 and he only get three weeks of vacation per annum. His wealth is solely wrapped up in MVL stock, and the best way to extract value from an equity is through acquisition. Insider selling only depresses the market value, either through a dropping bid price due to volume or through a decline in investor confidence. Perlmutter has 29 million shares of MVL, which is currently valued at $1.45 billion and enough to qualify for the Forbes 400 Richest Americans as well as their 500 Richest People. He'll have no problem making the transition from first-class confinement on United Airlines to a personal Gulfstream G-550 painted with "web juice." Yes, with that payday, he'll be running in the tall grass with the big dogs on Jupiter Island.

Another reason to sell may be the very thing that has propelled Marvel into a new (and very profitable) strategic line of business - movie production. Initially, MVL licensed its Spiderman intellectual property to Sony for the production of live-action films. But with the release of the shark-jumping Spiderman 3, Marvel decided to take the reins and produce movies in-house. They secured a $525 million credit facility, used the intellectual property of 12 characters pledged as content collateral, and became Hollywood producers. Except, unlike many Hollywood types, they actually made a great movie with the release of "Iron Man." Starring Robert Downey, Jr., this film generated $582 million in worldwide box office receipts, representing the second-best selling film of 2008. And that doesn't include revenues from lunch boxes, t-shirts, video games, etc. Sure, it cost more than $200 million to produce and promote, but it generated a 100% profit on the initial release ticket sales alone. But it does take a truckload of greenbacks to finance a movie and MVL's production credit line is fraught with conditions - namely, it requires them to use their own cash for 33% of the movies' budgets. Iron Man 2 is scheduled for release in May, 2010, but there are no Marvel movies being released in 2009. It could be that Marvel doesn't have the financial traction to become a movie factory (1-3 releases per year), but Disney certainly does. Provided that Disney does a Pixar with Marvel (i.e. no interference with day-to-day management), the home of the Hulk could ramp up faster than the Silver Surfer and pounce on its competitors like Wolverine. Or, if done improperly, like Hannah Montana and the Jonas Brothers...

On the dark side, there is a lawsuit winding its way through Federal Court in the Southern District of New York alleging that the characters created by Stan Lee actually belong to another company, Stan Lee Media. The plaintiff's lawyer is Martin Garbus, a larger-than-life trial lawyer - in other words, this is serious business. If true, Marvel would owe SLM 50% of all gross profits generated by any work involving a Stan Lee character (Spiderman, Fantastic Four, The Incredible Hulk, Iron Man, and many, many others) from 2004 and for 50 years into the future. Interestingly enough, Stan Lee is suing Stan Lee Media as an injured investor himself, but that's another story. Back when Marvel went bankrupt in 1997, apparently they canceled Stan Lee's contract. During the interregnum, a contract-less Lee was befriended by an alleged con man, Peter Paul, who formed Stan Lee Media (Paul was later charged by the SEC for securities fraud and accepted a 43-month time-served sentence; SLM went bankrupt in 1998 due to his looting, reemerging in 2006). Lee is reported to have transferred his intellectual property to SLM, and then later, when rehired by Marvel, also transferred his intellectual property to MVL. Therein lies the 50/50 split being asked for by SLM. What makes this more intriguing is that on January 27, 2009, Judge Stephen Wilson ruled in a California court that Lee and POW! Entertainment (Lee's new company) illegally transferred assets from SLM while it was in bankruptcy protection. If the assets that were illegally transferred include the X-Men, et. al. then Marvel is in deep trouble. Basically, this lawsuit is a dictionary-definition of FUBAR, and Disney has just the legal team to tie it up in court for 25 years or more. While this wouldn't be a sole reason to sell, it could be a mitigating factor.

Finally, perhaps the board and executive management of MVL truly believe that the Disney offer is the best and only way to generate shareholder value, and in a fit of altruism, are reluctantly parting with the company. Of course, Perlmutter is the largest single shareholder by far, so please return to Reason #1 and start over.

Maybe the reason to sell wasn't any one factor - it could be the conjunction of everything delineated above and then some.