6:55 AM PDT 4/24/2019 by Paul Bond
Scorched-earth legal battles and revenue streams at risk could delay Endeavor’s plot to go public as a drawn-out fight may lead investors to ask “why their business still makes sense.”
When the Writers Guild of America sued the four major agencies April 17 over packaging fees, it was a major escalation in a war that has upended talent-representative relationships. But even if WME, CAA, UTA and ICM beat the lawsuit, they may already be losing in one respect: The guild’s move to end an “illegal kickback” could effectively put on ice — or at the very least, slow down — any ambitions for public offerings.
WME, CAA and UTA are responsible for roughly 70 percent of Hollywood’s packaging fees, and each has at least explored the possibility of an IPO, though WME parent Endeavor is the one said to be in hot pursuit at the moment. But experts warn there may be little appetite to invest in a company that is engaged in a high-profile war with its own source of income.
Those with knowledge of Endeavor’s plans tell The Hollywood Reporter it is trying to raise about $500 million in an IPO that values the company at north of $6 billion, while a $400 million funding round from the Saudi government in March 2018 valued the firm at about $4 billion. But after journalist Jamal Khashoggi was murdered in October, Endeavor returned the Saudi money, and that move may have made the prospect of an IPO more appealing.
The company — run by CEO Ari Emanuel and executive chairman Patrick Whitesell — needs cash to pay down some of the debt it has amassed after acquiring more than 20 companies since 2012, when Silver Lake Partners became the first private equity firm to buy into the agency. It now owns a significant stake and has fueled Endeavor’s buying spree including its $4 billion purchase of Ultimate Fighting Championship in 2016.
The agencies’ war with writers “is definitely something investors will question, and if they don’t sort it out, it will hit the valuation,” warns Renaissance Capital analyst Matthew Kennedy, an expert on IPOs. “If a settlement happens in a few months, they could still be on track for a late-2019 IPO. If it drags on, they’ll have to explain to investors why their business still makes sense.”
“Packaging” refers to a decades-old practice of bundling writers with directors and stars and selling a TV show as an entire package, with agencies potentially reaping higher fees that the WGA says its members are largely entitled to. So far, the best the agencies have offered is to share with the WGA about 1 percent of the fees they earn from packaging. The guild wants to eliminate the fees entirely and says 7,000 of its 8,800 members with agents have signed letters firing their agents after the WGA and Association of Talent Agents failed to come to terms.
In Endeavor’s favor in its quest for an IPO is its ownership of acquired brands including Professional Bull Riders, the Frieze Art Fair, streaming delivery company NeuLion and the 160over90 marketing agency. It’s also good timing with the stock market strong (the S&P 500 is up 20 percent in two years), as is the market for IPOs (Pinterest and Zoom soared on their first day of trading April 18). “The window is open,” says Kennedy. “Deals are getting done — especially anything with growth. We expect this year to be active.”
Plus, in 2017, it further diversified its business by launching its own production unit, Endeavor Content. That’s inherently more attractive to investors than straight talent representation, because with production of content comes ownership (perhaps shared with talent) of the resulting intellectual property, such as the movie or TV series, the characters, the remake rights, merchandising and more. Over time, this becomes a library of content and IP, perhaps even including tentpole franchises — a much more valuable and durable asset than talent that can walk out the door at any time. CAA, majority owned by TPG Capital, has pursued a similar strategy with its Wiip production entity and a possible IPO in the future.
Even TV packaging fees are more durable than commission revenue streams. The latter drops dramatically if clients leave a show; the former doesn’t. In success, packaging fees can be much larger than commissions. And commissions can be harder to collect if a client leaves the agency, whereas packaging fees are paid by studios. The private equity infusions into the major agencies were premised on both of these durable revenue streams.
However, when The Wall Street Journal first reported March 29 on Endeavor’s intention to go public by year’s end, the WGA criticized the idea. “It is impossible to reconcile the fundamental purpose of an agency — to serve the best interests of its clients — with the business of maximizing returns for Wall Street,” said the guild.
That complaint, though, could apply even more to the current ownership structure, some experts argue. “The goal of the private equity firms that own the agencies is to pull money out. They don’t care beyond that,” says Eileen Appelbaum, an economist with the Center for Economic and Policy Research.
“They’d be better off public because management would have loyalty to the company instead of the private-equity ownership,” Applebaum adds. “With private equity, you may think you’re dealing with company management, but there’s somebody behind the curtain pulling the strings.”
Endeavor’s stakeholders beyond Silver Lake are SoftBank, Fidelity Management & Research Co. and Sequoia Capital, each of which could pocket millions of dollars while remaining large shareholders if the company should go public, which seems much likelier if the agencies can fix their WGA problem.
Adds Kennedy, “If they want to go forward with an IPO, it’s in their best interest to settle with the WGA. But if they think it’s cheaper to go to court [against the guild], they’ll wait on the IPO.”
April 24, 8:45 am Updated to clarify that Silver Lake Partners holds a significant minority stake in Endeavor.
Jonathan Handel contributed to this report.
Ahhh it’s a tad early for Scorch on the Rocks…ahhh again. Make that Scotch on…like I said a tad early!
The Ol’ SAG Watchdog
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