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Marvel Really Wants to Produce

I almost had a heart attack last Thursday. I was getting a quote of Marvel Enterprises (NYSE: MVL  ) , a company in my portfolio, when I happened upon the following press release. Oh boy, did my cardiac muscle truly flip out on me.

Marvel announced plans to enter the movie production business in an even bigger way. The company's current business model is simple, straightforward and very friendly on the margins: Marvel takes one of its famous characters -- Spider-Man, for instance -- and tells the likes of Sony, "Hey, go make a rockin' movie adaptation of our character with that cool guy who made The Evil Dead way back when, and let us take a cut of the box-office bucks." Well, I'm sure the proposal didn't go exactly like that, but you get the gist. Basically, Marvel sits back and collects a portion of the profits without committing a large amount of capital to the project.

That's why I became unnerved when I saw that Viacom's (NYSE: VIA  ) Paramount Pictures was hooking up with Marvel in a pact that would see Marvel produce and finance a celluloid slate for Paramount to market and distribute. Oh no, I thought -- Marvel is committing capital now! That handsome business model is about to become as disfigured as metal-masked Dr. Doom!

Then I noticed Marvel's stock was up on the news. Hmmm, how strange, I mused. I checked out the volume -- more than 2.5 million shares traded hands, quite higher than the 30-day average of approximately 840,000 shares. I expected a sell-off. Now, earnings were also released that day, so they had some effect to be sure (it also helped that Marvel resolved the Stan Lee litigation). However, I thought the significant development was that Paramount deal, and I was befuddled by the higher bid. What should I do next?

I decided to see what my fellow Fools had to say on the Marvel discussion board. After going through the flurry of posts on the movie deal -- including the prized post of the day -- I came to a conclusion: I was wrong!

Marvel didn't intend to throw a lot of the stockholders' cash at the future slate of films. Instead, it entered into a non-recourse financing structure with Merrill Lynch Commercial Finance Corp. that is collateralized by certain movie rights to a total of 10 characters from Marvel's vast vault. Marvel gets $525 million to make a maximum of 10 movies based on the company's properties over eight years, according to the parameters of the deal with Paramount. The distributor gets a distribution fee and guaranteed worldwide distribution rights to any resultant sequels. If Marvel's movies bomb at the box office, forcing it to default on its financing, Merrill Lynch gets the movie rights to the characters involved in the deal -- not a great loss for Marvel if these films aren't successful. Captain America and Nick Fury are up first on Marvel's production slate; it'll be two to three years before audiences see the results of this deal in theaters.

Bottom line: Marvel won't be gambling money from its coffers in the casino that is the movie industry. Specific expenses will obviously increase, since Marvel will be closer to the production end of things. But the company will retain a higher amount of the gold, since it's the one that set up the credit facility and ultimately generates the negatives.

Some of my initial reticence remains, however; I call this section of the article "The Slippery Slope." I hope Marvel resists any further changes to its business ecosystem -- that is, I hope management refuses to put too much capital and/or too many characters at risk for the cause of direct movie production down the line. Remember, shareholders were initially infatuated with that capital-friendly licensing motif.

In theory, this is an acceptable structure; in practice, Marvel has increased its exposure to the nastiness of bombs at the box office. I will remain a Marvel shareholder, however, and take the optimistic outlook that a couple of these new films will be blockbusters and that all of them will at least break even. (Note to Marvel: Keep the budgets prudent!)

Recent Takes on Marvel Enterprises:

You've seen how the Marvel discussion board can be helpful. Check it out. Keep in mind, we have a ton of boards that generate a lot of great investing ideas -- you'll want to stick around.

Marvel is one of David Gardner's most successfulMotley Fool Stock Advisorrecommendations. Want to learn more? You cansubscribe todayfor six months without risk.

Fool contributor Steven Mallas owns shares of Marvel Enterprises. The Fool has a disclosure policy.

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