Inherent volatility of entertainment business still an IPO impediment
But while the U.S. economy’s slow recovery from the 2008 financial crisis is among factors that have increased investors’ appetites, the inherent volatility of the entertainment business is still an IPO impediment.
There are a number of reasons for this, only some of them unique to agencies, where earnings can be dependent on a small group of clients with the clout to draw seven- or eight-figure paychecks.
Hollywood is a hit-driven business, which clashes with Wall Street’s preference for steady, dependable and predictable revenue streams — things that are more difficult to rely on when your top assets can walk out the door. Or see their multimillion-dollar paydays peter out.
There’s also the reputational risk involved for investors who might find the prospect of doing business in Hollywood sexy — but the unpredictability of it all isn’t for the weak of stomach.
That’s not to say that agencies don’t have reliable cash flows. Packaging a film or television show means a slice of the royalties in perpetuity (Rizvi Traverse sold its stake in ICM’s portfolio last year for more than $150 million), and other facets of the business — including event production and licensing — can provide more bankable revenues.
“These companies have built huge bases of virtually perpetual income streams,” said Roy Salter, senior managing director at FTI Consulting in the valuation and financial advisory services group. “Their key strengths are their ideas, creativity and closeness to the industry’s most significant value driver: the talent.”
But others caution that the rep biz is not that black and white. The fragile bond between talent and agency, for example, can complicate things.
“That contract isn’t 100% solid,” said one former entertainment financial advisor. “While those are all contractual relationships, you can’t enforce them, as it is a relationship business.”
One thing that helps offset risk: diversification. WME, in which equity firm Silver Lake holds a stake, and CAA, in which TPG Capital is an investor, have both grown in other areas besides talent representation. CAA has significantly expanded its sports operations in the past few years, and both agencies have sizable packaging businesses. CAA also is working with LionTree Advisers and UBS to prep a bid for global sports agency IMG, which many observers say would help the company reach the kind of scale investors could find more palatable. WME is also seen as a possible bidder.
Since there hasn’t been a big public talent agency for two decades, there is little to compare how private equity might consider the launch of an IPO now. ICM showed fairly consistent profitability during the 1980s: It scored big by packaging “The Simpsons” and “The Tracey Ullman Show,” both of which came with producer James L. Brooks. Its major clients included Mel Gibson, Eddie Murphy and Arnold Schwarzenegger. But the company suffered from some internal fracturing, and ICM went private again in 1988.
For film companies, more comparisons exist, complete with their own unique challenges. The inherent unpredictability of the movie business means needing to charm investors by offering them something they hate, often by offsetting volatility with major tentpoles or franchise hits.
“Wall Street likes to see steady and very predictable earnings,” said Lindsay Conner, co-chair of entertainment and media at Manatt, Phelps & Phillips. “That’s something that eludes even the most successful film companies, because hits may come from films that aren’t necessarily expected to be the key drivers of profit, and there are certain seasons of the year when the film industry is more active and less active. All of that leads to quarterly swings, which give the Wall Street analysts heartburn.”
MGM is the highest-profile company that’s considering going public, although insiders say any potential IPO is a long way off. Yet it’s not the only firm that may take the plunge. Relativity Media has actively looked at options for going public both in Asia and the U.S., while Legendary has discussed the possibility as it continues eyeing growth opportunities (although the company has no firm plans in the works).
Still, volatile though it may be, Hollywood has one big advantage over other industries: It’s Hollywood.
“The public loves showbiz,” Conner said. “And film IPOs are an opportunity (for people to own) a piece of Hollywood. And there is value (in that), even though that value is largely emotional.”