Arundel Partners Case. Alex Jensen, Collin Apgar, Mitchell Todd, Matthew Holmes

Transkript

1 Arundel Partners Case Alex Jensen, Collin Apgar, Mitchell Todd, Matthew Holmes

2 Case Introduction Arundel Partners Profits Movie Sequels Black-Scholes Valuation Assumptions Calculations Contract Notes Final Recommendations

3 Where is the Arundel Partners Profit? High Ceiling on a per movie basis Years of income from different revenue streams Theater rentals TV agreements Home Video The entertainment industry will always be present Emerging technology Present value of future inflows outweigh the fixed initial cost

4 Where is the Arundel Partners Profit? The movie industry is continuing to grow year over year Growth of 82.5% from 1980 to 1990

5 Why buy a portfolio versus single film? Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them? Diversification Cost Effectiveness Taking emotional response out of decision Financial rather than creative viewpoint

6 Black-Scholes Assumptions Used the average of PV of inflows and outflows for price and strike price Separate calculation on a per studio basis Separate standard deviation calculation per studio from one year return Risk free rate of 7.03% 3 Year Time Period 65% of revenues belong to Arundel Partners 80% of projected sequel expenses will be paid by Arundel Partners

7 Disadvantages of Black-Scholes High disparity between lower and upper bounds Single standard deviation doesn t account for all variation Standalone standard deviation metric doesn t account for an entire volatile industry The values given are projections of movies that have not been written yet Doesn t account that all studios are unique and should be weighted differently Using average values for the studio produces a more accurate representation than the median Impossible to get a standalone metric to represent an entire portfolio of movies accurately

8 Refining the Black-Scholes Method A more accurate forecast of hypothetical sequels The data set is highly distributed forcing an inflated standard deviation If more normally distributed we could more accurately find an option price

9 MCA Universal Sample Black-Scholes Calculation Standard Deviation = 72% Stock Price = $32.16 (Average PV Inflow) Exercise Price $22.28 (Average PV Outflow) Risk Free Rate = 7.03% Time = 3 Years

10 MCA Universal Sample Calculation C = $ Pay 80% of the call option Our recommendation for buying the rights is 80% of this price Taking 65% of revenues

11 Black-Scholes Pricing Per Movie

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13 Base Case NPV NPV = $ Million

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15 Cost Reduction If the original movie does not meet an adequate approval rating from trailer Arundel Partner s deserves a portion of their investment back Cost reduction of investment on horizontal axis Revenue/Cost percentage split on vertical axis NPV estimate is colored

16 Contract Notes Sequel Rights shall be purchased before original film is produced Arundel Partner s owns all intellectual property regarding the sequel movie Includes characters, settings, and storylines Arundel Partners own all rights to sequels, prequels, or spin offs of original film Likely to choose to hire original studio to produce Arundel Partners earns 65% of all revenues while paying the projected 80% movie call option cost These revenues exclude retail items, such as clothes or toys

17 Contract Notes Mandatory 30% focus group approval rating of movie trailer If < 30% Arundel Partner is owed 5% of their investment in the movie Payment for the movie theater rentals will be distributed one year after being released Payment for all other revenue streams will be paid quarterly Arundel Partners must decide to produce sequel by end of third year after the initial film s production date Includes right to abandon film project All right will return to original studio at this point

18 Final Recommendation Invest in 100 movies based on the success rate of each studio To diversify the portfolio Each price varies per studio based on Black- Scholes calculation Protect your assets with contract parameters Revenues Keep profit at 65% to ensure studios maintain a vested interest in the project