Marvel flexes its muscles
Riding high in Hollywood, the comic-book company is pursuing a risky new growth plan.

(FORTUNE Magazine) – With its characters serving as the inspiration for a string of successful films like Spider-Man, X-Men, and Blade, Marvel Enterprises (MVL, $22) has become a potent force in Hollywood during the past half-decade. In July the comic-book company is counting on another hit when Fantastic Four, one of its most popular titles, hits the big screen. Wall Street is projecting that the tale of four astronauts who receive superpowers after getting zapped by cosmic radiation will take in $100 million or more at the box office worldwide. Distributor 20th Century Fox is already said to be considering a sequel. And about 100 companies have merchandise tie-ins, producing everything from beanbag chairs to videogames. Ideally, the film will be the latest triumph in a turnaround that has driven Marvel's stock up fivefold in the past three years.

It could also signal the end of the run. In April, Marvel executives announced that they intend to plunge the company into Hollywood in a much bigger way. Specifically, they plan to radically overhaul its low-risk business model, in which Marvel licenses its characters to studios that produce the films. Instead, Marvel plans to spend millions producing its own flicks. The details won't be finalized until this summer, but the preliminary arrangement calls for Marvel to deliver up to ten films to Viacom's Paramount Pictures, beginning in 2007 or 2008, with production budgets ranging from $45 million to $180 million. "This certainly increases the risk," says Harold Vogel, a veteran film-industry analyst who heads Vogel Capital Management. "Producing movies is a different game."

Indeed, the new venture is a radical departure for Marvel. Once strictly a comic-book publisher, it was bought by billionaire Ron Perelman in 1989. But he loaded it with debt through a series of ill-timed acquisitions, driving it into bankruptcy in 1996. Marvel emerged from Chapter 11 two years later with Peter Cuneo, a turnaround specialist, at the helm. Cuneo remade Marvel by treating its 5,000 characters as brands and licensing them to moviemakers, toy manufacturers, television producers, and videogame designers.

That strategy was a bonanza for Marvel-to a point. By licensing its characters to film studios, Marvel collected a portion of each movie's profits without committing a lot of cash. Sales have tripled in the past three years, to $513 million. More than 40% of those revenues came from licensing. But licensing also meant that Marvel gave away most of the riches-which was particularly painful when its films became blockbusters. Spider-Man 2, for example, grossed $784 million in theaters worldwide, yet analysts estimate that Marvel received just 5% of Sony's box-office take.

Under the proposed deal, Marvel would keep a much larger share of the box-office revenues from the slate of movies it delivers to Paramount, while retaining the lucrative merchandising rights. Among the first new films expected to hit theaters is one about Captain America, a supersoldier who carries a red-white-and-blue shield. Considering Marvel's track record in Hollywood, the deal could be a smash: The 11 movies it has licensed to date have averaged nearly $300 million in worldwide box-office sales, according to Lehman Brothers.

But there are risks as well. Although Marvel says it has been intimately involved in the movies it has licensed so far, producing is another kettle of fish. From developing scripts to casting actors, making a hit movie is an inexact science. For funding, Marvel is arranging a $525 million loan from Merrill Lynch, with the film rights to ten of its characters as collateral. But it hasn't nailed down the interest rate, leaving analysts wondering exactly how much Marvel will wager to finance its Hollywood dream. With the stock selling for a lofty 21 times trailing 12-month earnings, investors could get clobbered if that dream fails to come true.