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Spider-Man's Guardian Angels


It's a long way from the Israeli desert to lush Beverly Hills, Calif. For Avi Arad, that journey has taken him from soldier to rent-a-car clerk to toy designer and, finally, to being one of the hottest producers in Hollywood, with a $25 million estate to prove it. Arad, born in Cyprus and raised in Israel, taught himself English as a boy by reading comic books. Today, as CEO of Marvel Enterprises' (MVL) studio operations, he holds the keys to some of the biggest action franchises going, including Sony Pictures Entertainment's (SNE) blockbuster Spider-Man and Fox's (NWS) X-Men movies. His latest project: the much-anticipated Fantastic Four, also by Fox, which opens July 8. Universal Studios and Lion's Gate Entertainment (LGF) have Marvel projects in the works, too.

Arad, who prefers an all-black wardrobe and sports a two-day stubble, is only half of the Marvel success story. In a classic good-cop, bad-cop pairing, the personable studio boss is teamed with Marvel Chief Executive Isaac "Ike" Perlmutter, every bit as private and litigious as Arad is public and schmoozy. (Perlmutter declined to be interviewed or photographed for this story.) Both were veterans of Israel's Six Day War in 1967 and came to the U.S. three decades ago with little but their big dreams. Some say the similarities end there. "They're an odd couple -- Ike is all elbows and Avi all charm," says Christian Brothers University professor Jeffrey A. Schultz, a onetime junk-bond trader who invested with Perlmutter in the mid-1980s.

CAPTAIN COLLATERAL

Together, Arad and Perlmutter have transformed New York City-based Marvel from a neglected comic book outfit into a sought-after, $513 million-a-year entertainment enterprise. All the while, they have zealously guarded Marvel's tally of 5,000 comic book characters, whose widely read stories are increasingly becoming rich fodder for action on the big screen. What's more, Arad is now enmeshed in the day-to-day operations of Marvel-inspired films. He's part of nearly every decision on a Marvel film, whether it's ordering a new hairdo for actor Hugh Jackman, who played Wolverine in 2002's X-Men, or getting star Tobey Maguire to do a Spider-Man sequel by finding him a special harness to minimize his discomfort from a back injury. "He's a strong part of everything. There is no backseat for Avi," says Sony studio chief Amy Pascal.

Now Marvel is taking the next step with plans to become its own studio: It intends to finance a slate of as many as 10 films over eight years. This will be possible, says Arad, through a $525 million revolving credit line secured with Merrill Lynch & Co. (MER). It's a risky move, since the credit is backed by the future film revenue generated by Marvel characters, including Captain America and Nick Fury. That means a string of bombs could threaten Marvel's film rights to such superheroes as Captain America, around whom its first flick is planned.

Arad's first step was to find a distributor. The pair was in serious talks with Universal Studios early on, but insiders say Arad infuriated them when he jumped to hit-starved Paramount Pictures (VIA) in April. His deal with the Viacom Inc. (VIA)-owned studio gives Marvel a cut-rate distribution fee and allows it to keep all the merchandising rights. Arad declined comment on the studios.

Scrappy fighters that they are, it's fitting that the two partners first met in the early 1970s in New York in an encounter over royalty payments. At the time, Arad was a toy designer trying to collect from Perlmutter, who owned a company that bought liquidated products. Perlmutter was already a crafty dealmaker who used money from his in-laws to buy the liquidation business. He would later become a corporate raider. Despite the earlier dispute, Perlmutter had taken a liking to the charismatic Arad. The two went into business with their 1990 acquisition of Canadian toymaker Toy Biz Inc., which won a lucrative contract to make toys for Marvel. That relationship led to the merger of the two outfits in 1997. When Marvel went into bankrutpcy a few months later, Perlmutter and Arad launched an unsolicited offer with $320 million in cash. In 1998, Perlmutter and Arad won Marvel in a bankrupcty court shootout with Marvel's controlling shareholder, financier Ronald O. Perelman.

During their battle for control, Arad and Perlmutter honed their partnership. A Marvel aficionado, Arad was able to sweet-talk investors with his grandiose plans for the characters. Perlmutter, who doesn't read comics and rarely goes to the movies, worked the phones, lining up bankers from his New York office or Palm Beach (Fla.) condo. Today, the two men speak daily but hardly socialize. Arad is steeped in the Hollywood scene, with homes in Beverly Hills and Malibu. Perlmutter goes to sleep at 9 and spends his days poring over spreadsheets, taking pleasure in early morning tennis games. "Ike is someone who doesn't like to lose," recalls Marvel toy and publishing unit head Alan Fine of a tennis thrashing he took when he was a KB Toys Inc. exec selling to Perlmutter. "No customer tennis for him."

FACING PRESSURE

Today, revenues from movie licenses and movie-related merchandise make up nearly half the company's revenues, resulting in a nice payday for Arad. His new contract extension bumps his $1.6 million salary to as much as $6 million with bonuses. If Arad is spinning gold, Perlmutter provides the muscle. Early on as chairman, he fired two Marvel CEOs and sold off a money-losing baseball card division. And he sent Arad to Hollywood to sweeten the cheapie deals Perelman had made during the bankruptcy. For the first Spider-Man movie, Marvel got $225,000 up front; now it gets $10 million off the bat for Spider-Man sequels. Last year it settled a lawsuit it filed against Sony, restructuring its 50-50 toy merchandising partnership to take a 75% share. Marvel is also suing Walt Disney Co. (DIS) over payments for Marvel cartoons on Disney's ABC Family channel. Earlier this year, Marvel settled with iconic Spider-Man creator Stan Lee, who had won a court suit in which he alleged he was stiffed of promised profits.

Now that Marvel has raised its profile considerably in Hollywood, the pressure for hits is on. Arad is overseeing 12 films in various stages of production, including scripts being written for Spider-Man 3 and Captain America. Perlmutter is doing his thing -- prowling the balance sheet, consolidating operations to cut costs, and looking for the next hot deal. With the premiere of Fantastic Four looming, the pair is hoping some of the characters' superpowers rub off on the Marvel empire.

By Ronald Grover in Los Angeles


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