Arundel - Musab.docx - Arundel Partners Case Analysis Lead Writer Musab Khalif To Dick Vogel and FINA 4242W TAs Date Arundel Partner’s Investment Plan

Arundel - Musab.docx - Arundel Partners Case Analysis Lead...

This preview shows page 1 - 2 out of 4 pages.

Arundel Partners Case Analysis Lead Writer : Musab Khalif To : Dick Vogel and FINA 4242W TAs Date : March 20, 2017 Arundel Partner’s Investment Plan Arundel Partners (Arundel) is considering buying sequel rights to a portfolio of films produced by one or more major US Studios. These rights would be purchased prior to production of the original films, with all sequel rights being purchased for a given studio. Arundel would then wait to see if an original movie was successful before deciding whether to produce its sequel. This agreement is unprecedented in the movie industry and entails many unknown issues that include, among others: legal or contractual terms and conditions, pricing risk, operational risk, and economic risk. Arundel will make the purchasing decision before original films are made, meaning they’ll have minimal insight into whether each movie will be a flop or a hit. Arundel’s calculations require earnings for a sequel portfolio to be at least $2,000,000 per film for studios to be interested in negotiating a sale. This paper thus attempts to estimate the value of sequel portfolio rights that Arundel may buy. To do so, we employ two methods: a) Discounted Cash Flows Model (DCF) and b) Black-Scholes Model (BSM). Reasons Arundel Partners Can Make Money Buying Sequel Rights As noted in the case, “If a particular film was a hit, and Arundel thought a sequel would be profitable, it would exercise its rights by producing the sequel … Alternatively, they can sell the rights to the highest bidder” (pg. 6). Inevitably, the performance of some original films would not justify sequels, resulting in the sequel rights not being exercised. Thus, the purchase of sequel rights is analogous to buying an option. Arundel feels they can do this successfully because Paul Kagan Associates has expertise in the analysis of the film industry. The firm has even "assembled proprietary data on industry cash flow" (pg. 6). Arundel has research data that allows them to predict favorable outcomes for movie sequels. Using this research, Arundel can accurately decide whether exercising their rights on a particular film is the correct choice. In conjunction with buying sequel ‘options,’ Arundel can utilize this expertise to invest only in films that stand to turn a large profit. An options contract is particularly beneficial in the highly volatile film industry. For example, on a typical film, the net profit is a mere 500k on revenue of 46.5M. An average of 12.5M for distribution fees, 15.5M for distribution expenses, and total negative costs of 18M shrinks the bottom line. Because profit provides a very small margin, given high operating risk, investors are often discouraged. Arundel’s proposal would remove some uncertainty and risk by simply paying a premium up-front for sequel options, with only positive outcomes assured from then-on.
Image of page 1

Subscribe to view the full document.

Image of page 2
  • Spring '14

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes