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 value calculation and obtaining its expected returns
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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 discounted PV to get the value of sequel rights. According to Exhibit 1, only MCA UNIVERSAL and THE WALT DISNEY COMPANY get positive portfolio valuation. If Arundel Partners can buy sequel rights cheaper than 4.58 million dollars per film (MCA UNIVERSAL) and 6.21 million dollars per film (THE WALT DISNEY COMPANY) respectively, the sequel rights are obviously profitable. On the other hand, Partners should be prudential about rights options due to negative valuations in other four studios. As we know that the sequel rights are not obligation and Arundel Partners can choose not to exercise the option, we apply Decision-tree approach. If
The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.
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
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.
In addition, once production started, the studio would inevitably form an opinion about the movie and the likeliness that a sequel would be possible. This would put Arundel at a disadvantage, because they would then have to negotiate the price for sequel rights on each film produced, while knowing much less than the production studio about the film.
(2) Cost reduction: Paramount & Viacom both have economies of scale and are doing business in a similar industry.
Main Line is also not entitled to the differential profit loss by comparing Basinger films to Fenn films. It is understandable how Main Line thinks they are because Basinger films do make more than Fenn films, but who can say with certainty that this would have been the case in Boxing Helena--a controversial and unconventional film to say the least. Again I direct your attention to the Bruce Willis and Whoopi Goldberg movie flop argument.
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
Motion pictures are a key driver of the market for entertainment products, one of the largest export markets in US. Motion picture industry consists of three stages: studio production, distribution, and exhibition. The studios produce the lifeblood of the industry, the films that are its content. The biggest players at this level are the majors, big studios which integrate production and distribution, as do the slightly smaller mini-majors. The next stage is distribution. Distributors are the intermediaries between the studios and exhibitors. Distribution entails all steps following a film’s artistic completion including marketing, logistics, and administration. Distributors coordinate the manufacture and distribution of
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.
Based on the previous module assessments, NBC Universal’s preliminary focus should be geared toward the film industry. The recent trade deal, between both the U.S. and Chinese Governments, lowered a 20-year-old quota on U.S. films and distribution fees in the Chinese film industry. This signifies productive progression within the film industry, even though small in nature, but nonetheless this could equate to significant profit gains for all the FMO’s within the market.
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?
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).
4. The bargaining power of buyers: The outlook for the target market isn’t favorable for the movie industry because it will not be growing as fast as the overall population. Buyer power is a strong force because of the target market and several other factors including: the undifferentiated product offered, switching to an alternative is simple and low cost, and customers can stay home and watch movies. The consumers are also complaining about concession and ticket costs, along with the advertisements before the film is shown.
5- The approach used to calculate the value of the Joint Venture was a DCF using the APV method. Since the two companies, Jersey and Prince, have distinct characteristics and costs of capital, they value the project differently. For Prince, the Joint Venture has a total
sale in the Arley financing then can be characterized as the sale of a share of common stock plus a