Arundel Partners

1) Sources of Value. Why do the principals of Arundel Partners think they can make money buying

movie sequel rights? You can’t make more than your required rate of return purchasing assets in an

efficient market. Why do the partners want to buy the portfolio of sequel rights in advance of the

movies production? They could instead negotiate for the rights to the sequels film-by-film some time

after production has begun or even after the original film has been released.

The principals believe that they can make money by buying options on movie sequel rights. By buying those rights, they have 3 choices:

• Exercise the options and produce the sequel (in this case the expected NPV of producing should be higher than the option’s price

• Sell the option

• Not exercise the option and lose their investment

They want to buy a portfolio of movies because that would help them diversify their risk (if the movies successes are negatively correlated). They want to buy the rights before the start of the production because they do not wish to negotiate with the studios. Indeed, once the studio starts the production of the movie, it might have a better idea whether the movie and a potential sequel will be successful.

Exhibit 7 shows that on average, the NPV of producing a sequel is negative. By bundling our risks and having the option, we can actually choose with sequels to produce.

If a movie is successful, according to the ratio used in Appendix 6, the sequel value is higher. Therefore, AP would have to pay a lot of money to acquire the rights.