----------------------------------- spootyhead Apr 17, 2007 Arundel Partners Case Analysis ----------------------------------- Arundel Partners Case Analysis Executive Summary: A group of investors (Arundel group) is looking into the idea of purchasing the sequel rights associated with films produced by one or more major movie studios. Movie rights are to be purchased prior to films being made. Arundel wants to come up with a decision to either purchase all the sequel rights for a studio's entire production during a specified period of time or purchase a specified number of major films. Arundel's profitability is dependent upon the price it pays for a portfolio of sequel rights. Our analysis of Arundel's proposal includes …show more content…
- More data on success probabilities may help to direct the course of action - We would also like to have information about the willingness of production companies to sell sequel rights at a pre-negotiated price. Action Plan: Given our analysis of the motion picture industry, we recommend that Arundel carefully select the major film studios from which they intend to purchase sequel rights. The net present value of hypothetical sequels taken from the available previous years shows not only that the industry is highly volatile, but also that certain production studios are more volatile than others in terms of their recent performance. In addition, some studios are consistently less profitable than others. (See "NPV for Each Production Company" chart in appendix) Since the success of film studios are relatively stable in the short term (see "Rental Shares of Major Film Distributors" table and graph) Because of this stability, it is possible for Arundel to approach more profitable studios with their offer to purchase sequel rights. Out of all the major film studios, only MCA-Universal, Warner Bros., and The Walt Disney Company generate a positive net present value on a per-film basis. However, according to casual inquiries, it is unlikely that any movie studio would enter negotiations with Arundel on a per film price that is less than 1 million. Instead, the film studios seem to
Arundel can make money selling the rights to a higher bid. Another option to make money is by producing the sequel exercising its rights but this will depend on if the net present value of the production movies is higher than the amount of buying the rights. If the future positive cashflows are undervalued Arundel can seek an arbitrage
Negotiate a clause where they can back out of the sequel rights or sell the sequel rights to some other investor
* X is the present value of the negative cost of hypothetical sequels at year 3; similarly, we attached different values to X for the various studios using an average of the present values of negative cost of hypothetical sequels at year 3 of each studio in 1999 (found in Exhibit 7). X was also computed for the overall
3. Visit the top 15 movie stocks according to HSX (http://www.movies.hsx.com/moviestockindex.htm). Do you agree with the predictions of the Hollywood Stock Exchange? How would you use a tool like this if you were a movie producer?
1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating movie-by-movie to buy them?
In this case, a movie industry analyst is asked to evaluate a proposed venture in which a group of partners would purchase the sequel rights to movies produced by the major studios. Your objective is to 1) discuss and evaluate the basic concept; 2) determine the value of the sequel rights on a per-movie basis; 3) evaluate the possible upside and potential drawbacks to the proposed plan. As you will see, the ideas here incorporate elements of capital budgeting coupled with a “real options” analysis.
After evaluation of the proposed acquisition of the movie sequel rights, we recommend to offer movie studios as a per-movie price to purchase the sequel rights for their entire portfolio of movies the studios are going to produce over the next year.
The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.
With the purchase of sequel rights, what Arundel is achieving is to have a call option on the revenue that each movie brings. This helps to remove the uncertainty and risks associated with producing a movie, especially with regard to moviegoers’ taste. With the sequel right, Arundel will only exercise this option to produce a sequel if the first movie proved to be popular and the sequel is hence predicted to bring in profits. This provides downside protection, as huge losses (due to high production costs) associated with a failed movie will be avoided.
Based on our valuation of the investment, as outlined below in the Analysis portion of the report, we have determined a per-movie-value of $8.9 million when considering purchasing the rights to the entire portfolio of 99 movies analyzed in the sample data. Based on production of 10 sequels, the per-movie-value of the portfolio would be $52.25 million. Our calculations based on the hypothetical portfolio is that Arundel Partners should make this investment as long as the present value of the expected cash flows from the sequel revenues exceeds the cost of production plus the cost of the investment. Depending on what value a studio will accept as payment per sequel, there appears to be significant profitability in the investment.
In 1992, Arundel Partners was looking into the idea of purchasing the sequel rights associated with films produced by one or more major movie studios. Movie rights were to be purchased prior to films being made. Arundel wanted to determine if this innovative business strategy is viable by estimating the value of the sequel rights.
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