----------------------------------spootyhead Apr 17, 2007 Arundel Partners Case Analysis ----------------------------------Arundel Partners Case Analysis Executive Summary: 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 en tire 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 fo r a portfolio of sequel rights. Our analysis of Arundel s proposal includes a net present value calculation of each movie production company. In order to decide whether Arundel can make money buying movie sequel rights depends on whether the net present value of the production company s movies is higher than the estimated 2M per film required to purchase the rights. Problem Identification: How are the principals of Arundel Partners planning to make money by buying righ ts to sequels? They would be interested in purchasing the sequel rights for one or more studios entire production over an extended period of not less than a year . If a particular film was a hit, and Arundel thought a sequel would be profita ble, it would exercise its rights by producing the sequel. Alternatively, they can sell the rights to the highest bidder. Inevitably, the performance of the o riginal films would not justify sequels, and for them the sequel rights would si mply not be exercised. For most movies it becomes quite clear after their first few weeks in theaters whether a sequel would be economical or not, based upon e ach film's box office performance. Why do the partners want to buy a portfolio of rights in advance rather than neg otiating film-by-film to buy them? It is of critical importance to Arundel that a number of films and a price per film is agreed upon before either Arundel or the studio knew which films would generate the option of a sequel. 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 Arunde l at a disadvantage, because they would then have to negotiate the price for seq uel rights on each film produced, while knowing much less than the production st udio about the film. What are primary advantages and disadvantages of the approach that was taken by us in valuing the sequel rights? Our analysis of Arundel s proposal includes a net present value calculation of each movie production company. Arundel feels that waiting to purchase sequel rights until after the movie goes into production wi ll make it more difficult and costly to purchase the rights. Below are advantag es and disadvantages of our approach. ADVANTAGES: - Simplicity - Because all available data was used, there is a greater sample in our analysis . We assume that more data points will lead to a more accurate conclusion.

- We did not eliminate any outliers because we felt outliers are characteristic of the industry. - The analysis is based upon historical data rather than fabricated assumptions. - We believe that breaking out the data by studio is an advantage because it pro vides direction. DISADVANTAGES: - It is assumed that historical performance is indicative of future performance in the short term based on historical data. Our assumption is supported by Exhi bit 1which shows that all production companies tend to have similar performance over time. - Only 1 year of historical data is available - We assume that production companies are willing to sell the sequel rights unde r our terms. - Probabilities of success have been calculated, but we have not been able to ap ply them to the per film value. In short, it is necessary to be subjective abou t the risk based on the probabilities of success. MORE INFORMATION: - More historical data would be useful to support our assumptions. - More data on success probabilities may help to direct the course of action - We would also like to have information about the willingness of production com panies to sell sequel rights at a pre-negotiated price. Action Plan: Given our analysis of the motion picture industry, we recommend that Arundel car efully select the major film studios from which they intend to purchase sequel r ights. The net present value of hypothetical sequels taken from the available p revious 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 rece nt performance. In addition, some studios are consistently less profitable than others. (See "NPV for Each Production Company" chart in appendix) Since the s uccess of film studios are relatively stable in the short term (see "Rental Shar es 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 pu rchase sequel rights. Out of all the major film studios, only MCA-Universal, Wa rner 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 indicate that they wo uld be willing to sell the sequel rights for about $2 million per film. Based upon this information, only Walt Disney and MCA-Universal Studios would ge nerate profit, if the $2 million per film price were agreed to. If Arundel were interested in purchasing rights from Warner Bros. Studios, it would need to neg otiate a price of less than 2 million per film, and should not pay Warner Bros. more than $1.92 million per film. Despite the fact that these three studios app ear profitable, it would be prudent for Arundel to consider the success rate of films produced by each studio. This is the percentage of profitable films produ ced by the studio. By far, MCA-Universal is the most successful in that regard,

with a 71.4% success rate, followed by Walt Disney with 45% and Warner Bros, wi th only 21%. Although this "success rate" may not be directly applied to the calculated per-f ilm values, it does indicate the classic case of "risk vs. return" and should be considered by Arundel. Whether or not Arundel chooses to simply purchase the r ights of all films to be produced by the studio, or some mixed combination, they should focus on MCA, Walt Disney and Warner Bros. If the $2 million estimated per-film price holds, then Warner Bros. should no longer be considered. Arundel should not, at any price purchase sequel rights from Sony Pictures, 20th Centur y Fox, or Paramount Pictures. Financial Analysis: 1. Why do principals of Arundel Partners think they can make money buying movie sequel rights? Who do partners want to buy portfolio of rights in advance rathe r than negotiating film-by-film to buy them? An analysis of Arundel s proposal includes a net present value calculation of each movie production company. In order to decide whether Arundel can make money bu ying movie sequel rights depends on whether the net present value of the product ion company s movies is higher than the estimated 2 million required to purchase t he rights. As can be seen in the exhibit to solution 1, Arundel would likely profit from pu rchasing the sequel rights of MCA Universal and Walt Disney Co. Although other production companies such as Warner Brothers generate a positive net present val ue, the 2 million per movie investment would lead to negative cash flows. 2. Estimate the per-film value of a portfolio of sequel rights such as Arundel p roposed to buy. As can be seen in exhibit to solution 2, we have estimated the per-film value of each production company. MCA Universal, Warner Brothers and Walt Disney Co are the only production companies that provide a positive per film value, with valu es of 9.89, 1.92, 12.56 million respectively. This value is calculated by divid ing the net present value of all the movies by the total number of movies. We a lso calculated the average value of each production company based upon their sha re of the total number of movies produced. The companies with positive values w ere MCA Universal, Warner Brothers and Walt Disney Co is also the only productio n companies that provide a positive per film value, with values of 1.40, 0.37, 1 .40 million respectively. These values are based on the average value per film multiplied by the company s average share of the industry.