Arundel Partners TEAM 4

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1 Arundel Partners TEAM 4

3 Universal Success of Terminator 2: Judgement Day - Box Office: - Opened in 2,300 theaters across the country on the Fourth of July Weekend 1991, $52m - Superstar at the box office, earned $204.8m in US/Canada and $519.8m worldwide - Third highest growing movie of all-time behind Star Wars ($530) and E.T. ($619m) - The original Terminator grossed $38 million in the U.S. in its theatrical run, while Terminator 2 achieved a 434% increase in box office revenue - Accolades: - At the 64th Academy Awards the film won Best Makeup, Best Sound, Best Sound Editing, and Best Visual Effects - Critical Response: Gene Siskel of the Chicago Sun Times, thanks to some truly spectacular and at times mystifying special effects well as as some surprisingly solid acting this is one terrific action picture, more enjoyable than the original

4 Movie Industry in Promotion of Movie based on: production, distribution, and exhibition - Major production companies in 1992: MCA Universal, Metro-Goldwyn-Mayer, Orion Pictures Corp, Paramount Pictures, Sony Pictures Entertainment, the Walt Disney Company, 20 th Century Fox, and Warner Brothers - These companies participated in the production and distribution, rarely the exhibition - These major studios accounted for 93% of revenues from US Movie Theaters

5 1 U.S. Theaters 5 Network TV 2 Non- U.S. Theaters 4 Premium TV 3 VHS Revenue Model

6 Arundel Partners Strategy - Purchase sequel rights associated with films produced by one or more major US movie studios - Wait and see approach - Innovative approach: - Purchase sequel rights during pre-production stages of films - No artistic judgements - Contract a portfolio for a specific number of films - Advanced cash payments at fixed rates would help finance initial production - Offer up front payments to studios to help fund movies - The feasibility for Arundel to make money depended on the price tag of the sequel portfolio (studies suggest $2m could get the job done)

RIDE THE SUCCESS THAT THE FILM ACCRUES SEQUELS

VOLATILITY LEADS TO GREATER PROFIT INVESTING IN

SUCCESS OFFERS FUNDING SOLUTION FOR STUDIOS IN

7 RIDE THE SUCCESS THAT THE FILM ACCRUES SEQUELS MAKE MORE PROFIT THAN THE AVERAGE MOVIE GREATER VOLATILITY LEADS TO GREATER PROFIT INVESTING IN MULTIPLES OPPORTUNITIES CASTS A WIDER NET FOR SUCCESS OFFERS FUNDING SOLUTION FOR STUDIOS IN NEED OF CAPITAL How Arundel Partners can make their investors money?

8 Film Portfolios vs. Individual Films Bundles the risk into a collective pool Greater likelihood that a successful sequel is discovered Acquiring the rights to an established film is more expensive Anticipating the success of an individual film is harder to predict

9 Financial Conclusions Best Investment Walt Disney Company Value of Call - $7.39M Worst Investment - Twentieth Century Fox Value of Call - $1.71M

10 Discount Rate: 12% Analysis Assumptions Probability Rate: 50% Advantages of Approach: Per Production Company Basis Properly Accounts for Risk Disadvantages of Approach: Based on 1-Yr. of Data Does Not Incorporate Success Rate of Production Company Basis

11 Weighted-Average Cost of Capital Unlevered Beta Return on Market 1988 Entertainment Industry Std.

12 Distribution Costs Problems and Disagreements Number of Sequels to Produce Time to Exercise 3rd Party Involvement

13 Contractual Provisions - Initial rights to studio for production or distribution - 3 year to exercise rights - Studio keeps some rights to merchandise - Studio has first option to buy rights back - Portfolio will not buy rights to movies that do not have opportunity for sequels (Biographies & Documentaries) - Portfolio must only contain original movies - Reimbursement if an original film is abandoned

14 Works Cited Anspach, Dana. How Would Historical Stock Market Returns Have Impacted You? The Balance Small Business, The Balance, 23 June 2018, Betas by Sector (US). Damodaran Online: Home Page for AswathDamodaran, New York University, Jan. 2018, pages.stern.nyu.edu/~adamodar/new_home_page/datafile/betas.html. Teichner, William A, and Charles M Williams Fellow. Arundel Partners: The Sequel Project. Harvard Publishing, Business School

15 Appendix DATA SOURCES, FINANCIAL INFORMATION, ETC.

16 Financial Data -MCA

17 Financial Data -Paramount

18 Financial Data -Sony

20 Financial Data -Warner Brothers

21 Financial Data -Twentieth Century Fox

22 Financial Data -Disney

23 Value of Call Options -By Studio

Arundel Partners: The Sequel Project

Harvard Business School 9-292-140 June 12, 1992 Arundel Partners: The Sequel Project In April 1992 Mr. David A. Davis, a movie industry analyst at Paul Kagan Associates, Inc. in Los Angeles, was asked