News May 8, 2008, 5:00PM EST

A Secret Identity for Marvel

With Iron Man, the comic book publisher has made an incredible transformation into a movie studio

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Chairman Maisel convinced the board that making films would pay off Asaf Hanuka

by Ronald Grover

Maybe Iron Man really can fly. The blockbuster superhero movie, starring Robert Downey Jr. as an industrialist who fights terrorists and arms dealers in a red-and-yellow metal suit, pulled off a $100 million-plus opening weekend. On top of that, the thriller could be a game-changer both for comic book publisher Marvel Entertainment and the way Hollywood finances films.

Iron Man's success—its spiffy script aside—owes much to Marvel's financial alchemy. The publisher controls the licensing rights to such iconic comic book characters as Spider-Man, the Hulk, and Thor. Now, its Marvel Studios unit aims to make a supersize mark in action-hero movies.

With 2007 revenues of only $486 million from character licensing, toy sales, and comic book publishing, Marvel needed financial heft to run with such big Hollywood studios as Sony (SNE) and Warner Bros. So the company in 2005 borrowed $525 million to set up an innovative film fund that bankrolled Iron Man and will fund other film projects through 2011.

Marvel managed to raise far more money, with far less risk, than its size would ordinarily fetch. It pledged the future film revenues for 12 of its characters as collateral for the bank loans. The move was the brainchild of Marvel Studios Chairman David Maisel, a former financial consultant and top lieutenant to the über-agent Michael S. Ovitz. Maisel convinced Marvel's board that film production, however chancy, would pay off big. "We get to control the destiny of our characters," says Maisel, who also is executive vice-president of the company.

Previously, Marvel has licensed Spider-Man and X-Men, among other characters, to studios for about 5% of the box-office take. Marvel also shared the films' lucrative merchandise revenues. This meant that Marvel left a lot of money on the table when it let Sony Pictures produce the Spider-Man movies. With Iron Man and other self-produced films, Marvel will rake in most of the proceeds and all the merchandise sales.

Maisel's team designed its film- production fund to keep the debt clear of Marvel's balance sheet. The lenders agreed to accept as collateral future film revenues for Iron Man (a sequel is already planned), Captain America, Nick Fury, and nine other Marvel characters. The fund secured a AAA-rating, in part due to the box-office track record of such cash-spinning characters as Spider-Man and the Fantastic Four. Marvel controls a library of over 5,000 other comic book characters.

Marvel now has the financial firepower to bankroll major releases while limiting its risk if a movie tanks. Worst case, Marvel might have to forgo earnings from some of its future films to cover losses and replenish the movie fund.

Marvel drew down about $150 million from the film fund to make Iron Man and is paying Paramount Pictures (VIA) 10% of net revenues from ticket and video sales on top of its fees for marketing and distribution. Still, Iron Man could generate $1 billion in box-office, home-video, and other sales. And profits (less expenses) could be nearly $200 million, projects analyst Alan S. Gould of brokerage house Natisix Bleichroeder.

That has Maisel riding high. "There are very few people who can make A-film products in this business; Steven Spielberg and Jerry Bruckheimer are some. And Marvel is one," says Rob Moore, Paramount's vice-chairman.

Now, of course, Marvel has to call up more action heroes to cement its place as a Hollywood player. The Incredible Hulk, starring Edward Norton, will be released on June 13. Future films will feature Thor and Captain America. For now, though, Maisel's street cred in Hollywood is, well, super.

Grover is Los Angeles bureau chief for BusinessWeek.

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