Ready or not, on Oct. 1 Hollywood will confront the new Creative Artists Agency – a new corporation, with new chiefs and a new financial base. Even though the company has lost several of its top agents, there’s little doubt that CAA will be a formidable force in the business.

When CAA’s nine new managing directors officially take control of Hollywood’s most powerful talent agency on that day, they will essentially be buying the business with no down payment and no bank loans – nothing but a five-year chit payable to co-founders Michael Ovitz, Ron Meyer and Bill Haber.

By contrast, seven years into rival International Creative Management’s buyout – which put chairman Jeff Berg, vice chairman Sam Cohn and president Jim Wiatt in financial control of 160 agents around the world – that agency has $27 million of its $63 million Chase loan to pay back.

Wall Street sources familiar with the two privately held companies’ finances estimate that CAA’s 1995 revenues are in the $150 million neighborhood, while ICM’s hover at around $100 million.

But those familar with ICM’s financial picture are quick to add that the agency has gradually improved its profit picture, sliding into the black in 1994 despite a recapitalization in 1992 and moving into a new building in 1993.

The company is quietly seeking outside investment at a time when ICM brass believe their financial picture is rosy. Last year, ICM’s revenues rose 25%; and its fiscal health prompted competitors to launch a spurious whisper campaign charging that the agency had missed a payment and was in danger of defaulting on its Chase loan. At the close of the agency’s fiscal year in June, net income for 1995 clocked in at roughly $1.4 million.

For CAA, Wall Street mergers and acquisitions expert Martin Lipton has designed a so-called earn-out system – much like buying Christmas presents on layaway – in which new Disney president Ovitz, MCA Inc. president Meyer and Haber will get bought out over the next five years with money generated by any deals the agency closed or initiated before each partner exited. The new CAA will continue renting its Beverly Hills-based, I.M. Pei-designed headquarters from a holding company called W&S Properties controlled by Haber, Ovitz and Meyer.

“The reason we structured the deal this way is that we wanted to keep 300 people in their jobs,” says one exiting CAA executive. “We didn’t want to put the new leadership in a position where they had to go to a bank for a loan.”

CAA Inc., the official name of the company that Meyer, Haber and Ovitz built over 20 years, will cease to exist on Oct. 1, when CAA LLC (limited liability company) takes its place. A member of CAA’s new brass sums up the deal: “Ovitz, Haber and Meyer will be getting rent and money from their deals. But after Oct. 1, all the deals belong to us.”

Changes are not in name alone. Last week Sandy Climan, CAA’s financial consulting guru, joined Meyer at MCA. Climan worked closely with the telcos, Credit-Lyonnais, Matsushita and Sony for more than a decade; his departure leaves a question mark over the future of the agency’s lucrative financial consulting business. But Credit-Lyonnais reaffirmed Sept. 15 its commitment to continue its relationship with CAA despite Climan’s exit.

That same week, photos of a scantily-clad Richard Lovett made the rounds after CAA’s new 30-year-old president agreed to participate in a bachelorette party stunt. Certainly, CAA is in the process of throwing off its taciturn mantle.

After a six-month stretch in which many agents were walking on pins and needles wondering which founder would leave first, there is a relaxed confidence in CAA’s halls. New co-chairmen Rick Nicita, Jack Rapke and Lee Gabler are viewed as more approachable than Ovitz. The new bosses’ informal manner combined with the fratty, take-noprisoners ebullience of the Young Turks has created a refreshing atmosphere at CAA after the final years of Ovitz’s steely, Sun Tsuinspired management style.

Mum on money question

Executives at the company are under strict instructions from Lipton not to comment on the company’s finances. But the earn-out scenario appears fraught with the potential for conflicts of interest. Conventional wisdom in Hollywood holds that if Meyer and Ovitz give preferential treatment to CAA clients – or if they continue to earn money from representing talent while engaging in the production of TV and films – they could also become the targets of antitrust investigation.

But sources say the earn-out structure is designed to avoid problems with the Federal Trade Commission or the Department of Justice. And it may also pass muster with the Hollywood guilds. The Screen Actors Guild regulations drawn up in 1939 forbid studios and their employees from owning interests in agencies.

But SAG Rule 16D of those regs also includes a loophole: “Should any indebtedness represented by notes or other written documents of an agent come into the ownership of any person, firm or corporation primarily engaged in the production, distribution or exhibition of motion pictures after negotiations thereof by the original holders of such obligations, without the connivance of the agent, the ownership of such obligation by any such person, firm or corporation shall not be a violation hereof by the agent.”

In English, that means Ovitz and Meyer have plenty of wiggle room since they are simply getting paid what they are owed from the old CAA, namely CAA Inc.

ICM: No comment

ICM has been notably mute during CAA’s financial restructuring – in sharp contrast to its vocal complaints in 1993 when French bank Credit Lyonnais retained CAA to advise it on running and ultimately selling its subsidiary, MGM/UA. ICM and other talent agencies contested the relationship as being in violation of the Sherman Anti-Trust Act, which was the provision used to force MCA in 1962 to divest its agency business.

The guilds too grew concerned, and that year CAA acquiesced to an accord that ensured CAA did not exert influence over MGM/UA in casting. The guild plan also forbid CAA from acquiring terms of MGM/UA agreements with clients of other agencies.

CAA’s new financial structure, under which Ovitz and Meyer will still earn money from CAA while they are studio executives, does not seem to have galvanized labor unions as the Credit Lyonnais situation did.

“Once the structure is finalized, the guild will schedule meetings with CAA to explore if there is any potential conflict of interest,” says SAG national executive director Ken Orsatti.

Although outsiders have remained quiet so far, CAA’s new financial structure was the cause of some spirited internal debate over the past two months. According to sources at the agency, the exiting CAA brass felt they deserved 90% of receivables from all deals that closed or were in motion by Oct. 1. Those agents staying at CAA felt that Meyer, Ovitz and Haber’s ownership was worth an amount closer to 75% of receivables to be paid out over five years.

Weighing agents’ worth

The debate apparently wrestled with such fundamental issues as the value an agency places on a representative who may not have brought a client into the fold but has taken care of his day-to-day needs for more than a decade.

The guilds will probably not be a major concern to CAA in the months ahead. And Meyer and Ovitz will probably bend over backward to avoid even the appearance of violating federal antitrust regulations, which are the one legal hurdle that could cause problems for CAA’s earn-out scenario. As long as MCA and Disney do not start favoring CAA writers, directors and actors in the months ahead, rivals will be hard pressed to make a case that fair trade has been restrained.

Nevertheless, it will be very interesting to see whether Meyer and Ovitz quickly close deals at MCA and Disney that they set in motion as talent agents. Only time will tell whether you can take the executive out of CAA without taking the CAA out of the executive.

Anita M. Busch in Hollywood contributed to this report.

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