Marvel Unmasked

By Kathleen Kingsbury

For most, it was simply a poignant moment in June's World Cup. Scoring his team's third goal to seal a victory over Costa Rica, Ecuador's Ivan Kaviedes pulled out a Spider-Man mask from his shorts, donned it and danced across the field, to the cheers of Ecuadorian fans. He did so in the memory of teammate Otilino (Spider-Man) Tenorio, killed in a 2005 car crash. But Marvel Entertainment executives took Kaviedes' tribute as their own. For a comic-book publisher, it marked a feat of superhero proportions: in less than a decade, the company had pulled itself out of bankruptcy to re-establish its global brand. "We've made Spider-Man beloved in even the farthest corners of rural Ecuador," says David Maisal, a vice chairman of Marvel Studios.

Not to mention more locally--on Wall Street. Marvel stock has leaped to $20 a share, from $1 in 2000. The films it produces with studio partners have grossed $3.6 billion. Licensing deals for its 5,000 characters, including Spider-Man and the X-Men, are worth $5 billion in retail sales. Next year could be even better, with Sony's release of Ghost Rider and Spider-Man 3.

Yet Marvel's future remains a cliff-hanger. "It's definitely one of the more--if not the most--difficult companies out there to forecast," says Bear Stearns analyst Glen Reid. In late May, just as Marvel kicked off what may be the greatest test of its powers yet--a slate of 10 independently financed films--the firm stunned investors and Hollywood alike by announcing that Avi Arad, the man behind the Spider-Man and X-Men film franchises, would leave to start his own production company. Not six weeks later, two more key execs departed unexpectedly--Tim Rothwell and Bruno Maglione, heads of Marvel's licensing and international divisions, respectively, perhaps Marvel's most important priorities.

That tumult has some analysts thinking Marvel is prepping itself for sale. "These are guys who'd be squeezed out by a merger," says Jefferies & Co. analyst Robert Routh, who owns Marvel stock. "A major move would make sense by the year's end."

What a potential buyer would get is a Marvel unrecognizable from the cartoonish operation it was eight years ago. First, owner Ron Perelman pillaged Marvel for cash and floated $250 million in high-yield debt. The weakened company couldn't make the payments and went bankrupt in 1996. Perelman had also sold off much of the company's most valuable intellectual property.

In 1999, Ike Perlmutter, who had bought control of the distressed outfit the previous year, hired as CEO Peter Cuneo, who had turned around such companies as Remington, Clairol and Black & Decker. Under the duo's guidance, Marvel slowly transformed itself into a conservative but lucrative licensing business. "I always tell people that when you come out of bankruptcy, it's like chemotherapy. You may be cured of cancer, but you're still very weak," says Cuneo, now a Marvel vice chairman. "But then along came Spider-Man."

The huge success of the first Spider-Man movie, in 2001, not only saved the day for Marvel but also set its business model in motion. Because Spider-Man's theatrical rights had been sold to Sony, Marvel received just 5% of the $400 million U.S. box office. But it raked in millions by licensing the Spider-Man brand, including $155 million from toys in the first year.

Marvel soon replicated that model with hundreds of its heroes, now bringing in nearly $230 million annually from more than 500 licensing partners. Today the Marvel brand adorns everything from toys, games and apparel to hotels and theme parks. "Marvel has the best array of characters of any licensor in the business," says Brian Goldner, president of Hasbro's U.S. toy division, whose company in January guaranteed Marvel at least $205 million for its toy licenses over the next five years.

The key to Marvel's future, though, is not trinkets but storytelling. Marvel's most iconic characters were created in the 1960s by comic-book legend Stan Lee, but 30 years on, the stories had become tired, and comic-book sales were miserable. So in 2002 Marvel began to hire writers and artists from outside the comic business, turning instead to TV and film writers and novelists. The results have reinvigorated the industry, says Gerry Gladston, a co-owner of New York City's Midtown Comics. "The stories have gotten better and better, fans are thrilled, and sales are climbing," he says. Marvel produces about 70 titles a month these days, and its market share of the $450 million industry has nearly doubled since 1999. Gladston adds, "Marvel's pretty much rocketed all publishers into a new age."

Buoyed by its hits, the company has turned its attention to frontiers previously left unexplored. Many of its comics now arrive from cyberspace, and the amount of interactive features and user-created content on its website increases daily. Marvel is also exporting its characters. In Japan, Spider-Man is a 4-ft. version of himself. In India, he exchanges his blue-and-red suit for more native garb. "Our strategy is to find best-in-class partners in those respective parts of the world and use their expertise and cultural knowledge," said Rothwell before exiting Marvel in late July. "We allow our characters to transform for the local culture."

Marvel management still sensed it was leaving money on the table. For years it watched studio partners reap billions while the company took home only a small percentage of movie profits, especially on DVDs. "If we wanted to control our own destiny, we'd have to make our own movies," says Michael Helfant, president of Marvel Studios. That was a leap Marvel's risk-averse board was loath to make on its own dime.

Instead, Marvel secured a $525 million nonrecourse credit facility--other people's money--from Merrill Lynch to make 10 films by 2012. Production is under way for the first, Iron Man, to be released in May 2008. Marvel's new studio can spend up to $165 million a flick--still relatively low for the production of an action film with sophisticated special effects, warns media analyst Harold Vogel. "And they've got to create excellent stories to stick out in the oversaturated superhero genre," Vogel says. If the studio goes over budget on a film, Marvel could be forced to use some of its own cash or seek out a partner.

The biggest risk is that a dud at the start could imperil the value of the 10 characters Marvel plans to use in subsequent movies, including the Incredible Hulk. So while Marvel isn't risking any of its own cash, "there's no question that there would be a perceptual impact on the stock," says Cowen & Co. analyst Lowell Singer. Which is why Marvel left many scratching their heads when it let producer Arad strike off on his own. "Avi's contract was up in November, and Marvel couldn't afford the compensation he can demand," Cuneo explains. "So we thought we'd let him leave on our terms." One being that Arad will be involved in at least the first three Marvel films.

Others see Arad's exit as a sure sign that Marvel will soon change hands. Perlmutter is a candidate to buy some 20% of the company that he doesn't own; so is a private equity firm. Another logical buyer is Paramount, which will distribute Marvel's film slate. The studio is revamping, having recently bought rival DreamWorks SKG. Other names thrown out include Disney, which owns a large chunk of the Marvel library, and even TIME's parent, Time Warner, which owns Marvel rival DC Comics.

For now, Marvel must focus its energy on making its movies successful. That means getting its house in order and curtailing further executive turnover. As the Motley Fool's Tim Beyers noted, "There's simply no way the comic-book publisher will become a movie mogul with a mishmash organization." Even if it does have superhuman strength on its side.