As talent agencies expand into other businesses, some in Hollywood are wondering what William Morris Agency chief Jim Wiatt plans to buy once the agency completes a fund designed to raise between $500 million and $575 million via a wonky vehicle known as a special purpose acquisition corporation.
The agency, which would not comment on its filing plans per SEC rules, filed for the SPAC last Dec. 27 for an entity called Performance Acquisition Corporation.
The entity is being guided by Citibank. Its president/CEO is acquisitions veteran Jonathan Ledecky; the chairman is Eric Watson, formerly of Endeavor Acquisition, a firm unrelated to the talent agency.
The board includes veteran sports broadcaster Jim Gray, Robert Hersov of NetJets Europe, WMA exec veep of corporate development and new ventures John Mass, Carlyle Group exec Edward Mathias and Major League Baseball exec Jimmie Lee Solomon.
Most Hollywood agencies are said to be exploring financing opportunities, either to venture into other businesses or even to ease cash flow problems that resulted when commissions dried up during the writers strike. Observers see WMA’s SPAC attack as a bold and inventive strategy, though filing for a SPAC does not mean a deal will be consummated.
The move comes against an ominous economic backdrop.
As a jittery market continues to digest subprime mortgages, Bear Stearns, oil and currency woes, many Wall Streeters regard Hollywood with caution, creating a tough situation for anyone looking to tap the credit markets. SPACs are a breath of fresh air because there is less emphasis on Monte Carlo simulations or P&A stipulations. The concept, born a decade ago, is about identifying an area of interest, amassing the capital, and then choosing a specific target.
When SPACs began in the late 1990s, they were underwritten by bottom-feeding players. Now, underwriters such as Citi, JP Morgan and Lazard Freres have helped launch consumer brands like Jamba Juice, Golfsmith and American Apparel.
SPACs, which are commonly known as “blank-check companies,” are not considered an effective way to borrow to fill a cash-flow gap, or even to finance the construction of new headquarters, which WMA is about to start building.
The Morris maneuver is in step with a recent surge of SPACs in the media and entertainment biz amid an overall doubling of launches in 2007.
The roster of people launching SPACs in recent months includes former high-ranking execs at Sony, AOL, ABC and Anchor Bay.
Both R. Steven Hicks, the Austin, Texas-based radio mogul, and his billionaire brother Tom Hicks jumped into the game last year, as did Ron Perelman. SPAC board members and advisors include the likes of one-time NBC exec Scott Sassa, Walden Media’s Cary Granat and deep-pocketed AOL alum Ted Leonsis.
L.A.-based blank-check company HD Partners, headed by a group of DirecTV vets including former chief exec Larry Hartenstein, raised $150 million last year and bought the National Hot Rod Assn.
There are rules, however, and SPACs should not be confused with otherwise constituted private equity or hedge funds. Under SEC rules, SPAC money must be spent within two years of being raised, and 80% of it must be spent on a single acquisition.
If those funds aren’t spent, they must be returned, and the party that initiated the SPAC will be out the 4% it invested. In addition, a company applying for a SPAC can’t know going in what it will spend the money on.
The stated purpose of Performance Acquisition Corporation is broad: it will make an acquisition in the areas of the “entertainment, media or publishing industries,” which could encompass anything from another talent agency, to an ad agency, broadcast business or even a sports industry enterprise.
The other hitch is that people starting SPACs must invest 2.5% to 5% of their own money, which is at risk, and then go on to manage the combined entity after the acquisition.
Compared with other funding sources, SPACs are harder work, given the shareholder approvals and due diligence involved. Some Wall Streeters who have toyed with them lament the extensions they needed to file with the SEC and the stress over yielding control to shareholders, especially in a competitive bidding situation.
“Even if a SPAC offers more than a private equity firm, a seller could favor the P/E money because it may be the best offer,” notes one banker involved in a lot of Hollywood financings.
But in these volatile economic times, an industry-focused fund with cash in hand may sound awfully appealing to a lot of partners in the dance.