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Arundel Partners Essay

3655 words - 15 pages

DUISENBERG SCHOOL OF FINANCE MSc FINANCE Corporate Finance and Banking

Arundel Partners: The Sequel Project
The East Wind
Amol Marathe 140843 Linglan Tan 140838 Xiangyu Zhou 140912 Date: 20/11/2014

Arundel Partners: The Sequel Project

The East Wind

Executive Summary:
Arundel group is looking into the project of purchasing the sequel rights associated with films produced by one or more major movie studios in United States. Arundel believes that they can calculate a value for the rights to produce these sequels and take a position by investing in a portfolio conformed of these rights. Arundel Partners plans to make money by negotiating an option price below its net present ...view middle of the document...

After distribution expenses, distribution fees, the negative cost, and any other expenses were subtracted from all revenue, what remain were net profits.

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Arundel Partners: The Sequel Project

The East Wind

The median release data for a sequel was 3 years after the first film’s release, and most were released within 1 to 5 years. The cost and revenue of the typical sequel film will be 120% and 70% of the initial one.

Statement of Problem:
1. Arundel Partners has to arrive at a price to buy rights of sequels which will be lucrative enough for studios to sell the rights to them, similarly it should be below the value of call option. 2. Arundel partner has to come up with a format of contract which will provide both Arundel Partners and studio a right share of distribution of earnings from business.

Analysis & Recommendation
1. Buying a set of sequel rights before the production of first films means Arundel Partners can get the sequel rights at a low prices. The bids offering more than 2 million dollars per film will be appealing to a major studio, and the amount is small compared to potential revenue bought by sequels if the first film is successful. On the other hand, even if the first film is not successful and Arundel Partner will not want to finance the sequel, they can sell the right to highest-bidder or just keep it until expiration without exercise. If some initial films turn out to be successful, the following revenue from owning the sequels rights can be far higher than the loss from option premium without exercise. In a nutshell, the potential revenue will be enormous while the loss is limited, and Arundel Partners have a high possibility of making money by owning the portfolio. The value creation primarily comes from the right to get potential profit of successful sequel films. By buying a portfolio of sequel rights to all films in advance, Arundel Partners can avoid diminishing uncertainty of sequel films, and thus keep options valuable and buy sequel rights at a
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Arundel Partners: The Sequel Project

The East Wind

low price. In the film-by-film negotiation scenario, Arundel Partners have to distinguish valuable films, which is both time-consuming and costly. Since studios know better about production, there will also exist information asymmetry between Partners and studios. This will increase the Arundel Partner’s risk of buying unprofitable sequel rights. If Partners want to buy sequel rights of successful films, the studios will also charge very high prices.

2. In all the three methods below, we calculated the per-film value of a portfolio first, and then make a summary based on the six main studios. The classified summary should help us analyze different film sequel rights and which price Arundel Partners should pay. In the DCF Valuation, we discounted the PV of Net Inflows at Year 4 and PV of Negative Cost at Year 3 to Today respectively. Then we make the difference of the two...

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