Arundel Partners: The Sequel Project

Arundel Partners: The Sequel Project

Investment Analysis and Opportunity Review

EXECUTIVE SUMMARY

Background

The proposed business venture, Arundel Partners, is an investment group which would purchase the sequels rights associated with all films produced by 1 or more selected U.S. movie production studios for a specified period of time, or a specified number of films. As your investment analysts, our goal is to assess the value of the sequel rights to allow a determination of the value of the overall investment as well as a reasonable price-per-film for the sequel rights.

Arundel Partners plans to pay to obtain a guarantee to the ownership of sequel rights for a set of films prior to production. It is assumed that only a small percentage of the films produced by a studio will be sequel candidates, based on the profitability of the initial film release. It is also recognized that the profitability of a sequel is typically lower than the initial release. This estimated profit will determine the proposed contract offer by Arundel Partners to the selected studio.

Sequence of Events

**Note: The diagram in Figure 1.1 outlines the timeline as it applies to the Arundel investment described.

Prior to proposal, Arundel will need to determine which studio they feel offers the best potential success, and propose the contract prior to knowledge of films to be produced during the contract period. Arundel will then own the sequels rights as defined in the contract. History suggests that a studio would entertain an offer around $2 million per film for the rights to the sequels of each move it produces that year.

FIGURE 1: SUMMARY OF EVENTS BY YEAR

Arundel’s ownership rights begin on day 1 (year 0) of the contract. The lifeline of a film, as shown in the timeline above (please see Figure 1), is: 1 year in production; release to theaters and on video over the next calendar year; and, Pay TV in year 2 and Network TV in the 3rd calendar year. A sequel is typically released to theaters 3 years after the orignal film’s initial release. Sequel rights also expire 3 years from the films initial release. Note that Arundel must declare, based on the profitability of the first release, whether or not it will produce the sequel, prior to the expiration of the rights at year 4.

RECOMMENDATION

Based on our valuation of the investment, as outlined below in the Analysis portion of the report, we have determined a per-movie-value of $8.9 million when considering purchasing the rights to the entire portfolio of 99 movies analyzed in the sample data. Based on production of 10 sequels, the per-movie-value of the portfolio would be $52.25 million. Our calculations based on the hypothetical portfolio is that Arundel Partners should make this investment as long as the present value of the expected cash flows from the sequel revenues exceeds the cost of production plus the cost of the investment. Depending on what value a studio will accept as payment per sequel, there appears to be significant profitability in the investment.

ANALYSIS

As with all options there is more potential profit if the value of the underlying asset is very volatile. Purchasing sequel rights prior to release of the films makes this a very volatile investment. The proponents of this venture believe that Arundel Partners can make money buying sequel rights because the investment is structured as an option. They are not required to produce