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CASES

Arundel Partners: The Sequel Project


Introduction and Questions
Prof. Hugues Pirotte
SOLVAY BUSINESS SCHOOL
UNIVERSIT LIBRE DE BRUXELLES

Arundel Partners: The Sequel Project

The Context

April 1992: David Davis must take a look at a unusual business idea

Arundel Partners would purchase sequel rights from major studios


Before the first film was made
Purchase all sequel rights and not choose based on own judgment, or at least a random
selection of them
Pay upfront in cash on a fixed price per-movie basis, for the whole lot.

Interesting to studios because


Provides cash when it is most needed, i.e. at the production stage
Help in reducing studios borrowing (privately-financed industry in US Europe)
A price of $2 mio or more per movie would be tempting

Steps in movie production


1. Production
2. Distribution
3. Exhibition

Statistics

Major studios distributed 35% of all films accounting for 93% of revenues coming from
exhibitions.
H.Pirotte

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Arundel Partners: The Sequel Project

The Context (2)

Cost structure

The total production cost is called the negative cost, including


Pre-production costs: story acquisition, script development, set design, casting, film crew
creation, costume design, location scouting, budget planning.
Principal photography: fixed salaries of actors, directors, writers and other personnel; rent,
wages for soundstages, set construction, lighting, transportation, costume making, special
effects, etc
Post-production costs: editing, laying down sound and music, titles and credits.

Distribution costs: deducted from revenues collected by the distributor form theaters
and ancillary markets
Distribution expenses: advertising, etc
Distribution fees: % charged by distributors on revenues perceived

Exhibition costs:
On average, in 1991, 50% was remitted by the theaters to the distributors

Net Profits
= all revenues (proceeds remitted to distributors + )
negative cost distribution costs exhibition costs

H.Pirotte

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Arundel Partners: The Sequel Project

About the sequel

The median release data for a sequel was 3 years after the first films release,
and most were released with 1 to 5 years.

Profit structure (averages)

Costs: 120% of original movie

Revenues: 70% of original movie

Arundel Partners proposal

Critical to agree on the number of movies and the price per movie before either
Arundel or the studios knew which films would be produced.

A satisfactory method of payment should be agreed upon (escrow account, etc) +


maybe some incentive plan for the studio still.

For tax purposes, desirable to fix an expiration date for the rights like 3 years from the
first films release.

Arundel could grant the studios a right of first refusal on any rights it planned to sell.

The contract also could provide that Arundel would use the original studio for
distribution, assuming its distribution fees are competitive.

H.Pirotte

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Arundel Partners: The Sequel Project

Time scale
Distribution
and Exhibition

Production

Production

Distribution
and Exhibition
Time
(years)

1
First movie

3
Delay

PV(Neg Cost)
Hypothetical

Sequel

The Data we
have in the
case

PV(Rev)
Hypothetical

H.Pirotte

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Arundel Partners: The Sequel Project

Data

Data is provided in the external spreadsheet on the website.

This data includes

Hypothetical sequel costs and revenues based on first films estimated data, under
some assumptions
Projections assuming the sequel would be produced and would be typical
Not surprisingly however, most movies hypothetical sequels would not be produced because
of poor projected performance.

The questions on the next slide are related to the pricing per movie of these
sequel rights
1. Choose those that would be produced, estimate how much net money that would
make and give a price per sequel then

Can be stress-tested by scenario analysis.

2. Apply a simple option pricing model

H.Pirotte

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Arundel Partners: The Sequel Project

Study Questions
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 film-by-film to buy them?
2. Estimate the per-film value of a portfolio of sequel rights such as Arundel
proposes to buy. (There are several ways to approach this problem)
3. What are the primary advantages and disadvantages of the approach you took to
valuing rights? What further assistance or data would you require to refine your
estimate of the rights value?
4. What problems or disagreements would you expect Arundel and a major studio to
encounter in the course of a relationship like that described in the case? What
contractual terms and provisions should Arundel insist on?

H.Pirotte

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H.Pirotte

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Solutions
C Se qT N d1 Ke rT N d 2

Se qT
ln
Ke rT

d1
T

0.5 T

d 2 d1 T t

P Ke rT N d 2 Se qT N d1

A. Farber & H.Pirotte

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Solutions
250

200

150

Upper bound
Stock price
100

50

Lower bound
Intrinsic value Max(0,S-K)
0
0

10

20

30

40

50

60

70

80

Action

90

100

Option

110

120

130

140

150

160

170

180

190

200

Valeur intrinsque

A. Farber & H.Pirotte

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