Arundel Case Solution

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

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.

Arundel should make an offer to buy sequel rights as the average NPV (on a per film basis ) is $5.51 mn (this is the value calculated using real options method).

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.

Key Issue 2: Is $1b appropriate to enhance UST’s firm value and ultimately shareholder value?

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

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