Arundel Partners: the Sequel Project 1
Case 1. Arundel Partners: The Sequel Project 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?
The principals at Arundel Partners believe that there is value that is not captured in a discounted cash flow when analyzing the launching of a film. They believe that by launching a new film, there is immediately an option to launch a sequel that can generate future cash flows not accounted in the discounted cash flow. Since creating a sequel of an original film is not an obligation, the studio can wait and see if the original film had a positive net present value and decide whether or not to go ahead with the project. By valuing the rights of the movie sequels and offering them to investors like Arundel, the producers of the film can obtain financing for the early stages of the original film. Conversely, Arundel believes that by valuing these rights using a Black-Scholes Option Pricing model, 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 on the option. If indeed a movie becomes a sequel then the value of the option will increase and Arundel will either exercise the right to make the sequel or sell the right either to the original studio or a third party willing to take on the project.
The principals at Arundel Partners are inclined to buy a portfolio of all these sequel rights rather than individual films given that Arundel wants to avoid buying the rights of movies that are not expected to perform well. Arundel would need to know exactly the number of films as well as the name of the films that will make part of the individual selection. Also, buying a portfolio
The principals at Arundel Partners believe that there is value that is not captured in a discounted cash flow when analyzing the launching of a film. They believe that by launching a new film, there is immediately an option to launch a sequel that can generate future cash flows not accounted in the discounted cash flow. Since creating a sequel of an original film is not an obligation, the studio can wait and see if the original film had a positive net present value and decide whether or not to go ahead with the project. By valuing the rights of the movie sequels and offering them to investors like Arundel, the producers of the film can obtain financing for the early stages of the original film. Conversely, Arundel believes that by valuing these rights using a Black-Scholes Option Pricing model, 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 on the option. If indeed a movie becomes a sequel then the value of the option will increase and Arundel will either exercise the right to make the sequel or sell the right either to the original studio or a third party willing to take on the project.
The principals at Arundel Partners are inclined to buy a portfolio of all these sequel rights rather than individual films given that Arundel wants to avoid buying the rights of movies that are not expected to perform well. Arundel would need to know exactly the number of films as well as the name of the films that will make part of the individual selection. Also, buying a portfolio