Is it foolish for Marvel to continue it's share buy back campaign?
at least one motely fool think's so:
fool.com
Marvel: Stop the Buybacks!
By Tim Beyers (TMF Mile High)
June 7, 2006
Maybe you're not a fan of comic books like I am, but Monday's news that Marvel Entertainment has authorized a buyback of another $100 million worth of its shares feels like a scary plotline -- as if some scheming villain is setting a trap from which there's no escape.
Here's why: Marvel is in no position to be buying back shares. Check the cash flow numbers. Capital IQ reports that Marvel's trailing-12-month actual free cash flow was $186.3 million. That's outstanding, till you consider that over the same period, $429 million of the company's total cash flow was spent to buy back 23 million shares at an average price of $18.35 per stub.
What's so bad about that, you ask? It's got little to do with the buyback price. After all, you can argue that Marvel's shares are undervalued. My problem has to do with the debt the company is piling up, more than a little of which is intended for buying back shares.
Consider the most recent 10-Q. On page 25, it says that Marvel recently borrowed $20 million from a $150 million credit facility to repurchase shares. The floating interest rate, by my calculations, is probably no less than 6.73% right now. It could, however, be as high as the prime rate, which stands at 8% currently, according to Bankrate
Even more interesting is that this credit line falls to $100 million on August 15 of this year. Maybe my Fool sense is overreaching, but does anyone else wonder if Marvel is trying to borrow and buy back as much as it can before $50 million of its buying power magically disappears?
Whatever the reason, I find it odd that Marvel is so bent on buying back shares when it will soon be saddled with huge debts to make movies. Remember: Two of Marvel's first films as an independent studio don't yet have financing.
Yes, you read that correctly. Though newly-independent uber-producer Avi Arad and Marvel are working to include the two films under an existing $525 million financing deal with Merrill Lynch and Viacom's Paramount Pictures, nothing has been signed yet. Marvel could still have the need to tap other financing sources.
But for argument's sake, let's say that doesn't occur. Marvel's current credit agreements are still pretty draconian. Indeed, SEC filings say that Merrill could force Marvel to pay between 7% and -- gulp -- 13% to finance its projects. How might that impact cash flow? Probably not much, if Marvel produces a blockbuster. But what if it doesn't? Well, 7% of $525 million is approximately $37 million in interest. That would be equal to roughly 23% of the $162.25 million in earnings before interest and taxes Marvel has averaged over the past four years; and that's just if the interest rate is in the low range. What does that add up to in English? A lot of moola.
So please, Marvel, stop the buybacks. Cliffhangers, financial or otherwise, are meant for the comics and the big screen. In the real world, dancing on the precipice too often leads to a nasty fall. |
