The partners behind William Morris Endeavor’s $2.4 billion acquisition of IMG Worldwide set out to build something monumental.
But a little more than a year after closing the blockbuster transaction, the WME/IMG regime is busy mending strained client relationships, dealing with inflated projections inherited from the previous owners of 55-year-old sports agency, and facing broad structural and secular changes that were squeezing the margins of the very division that was billed an earnings champ during IMG’s competitive auction process.
While clients including Oprah Winfrey, Gisele Bundchen, Matt Damon and Serena Williams have given the new WME/IMG marquee luster, analysts had predicted the real revenue booster-rocket inside the new super-agency would be IMG College — a less-glitzy business unit, but one that would churn out millions of dollars by helping university sports programs secure rich media rights and licensing deals. When the merger was announced, the sports agency called IMG College “the centerpiece” of its business model.
Today, IMG College is fighting to repair relations with some clients, confronting formidable new competitors, and coping with educational institutions that increasingly are thinking about dumping agency middlemen in order to cut TV, radio, branding and merchandising deals on their own. Just last month, the Pac-12 Conference paved the way for member universities that want to go it alone.
The IMG unit’s profits have fallen far short of projections made before the May 2014 merger with WME, with EBITDA (earnings before interest, taxes, depreciation and amortization) of about $60 million last year, compared with the $90 million projected for 2014, and the more than $100 million envisioned in 2015, say sources inside and outside the company.
Underperformance on projections was pronounced enough that WME/IMG in March was forced to report an “impairment” of assets to the holders of its debt. While the largest of WME’s loans on the purchase trades slightly above par on the lending markets, a second lien recently went at a deficit, indicating the market views the loan slightly less favorably than when the debt was issued.
“Their margins are being squeezed, no question,” says a consultant who represents many college clients. “IMG College will still make money, but there isn’t as much promise as there was before.”
Representatives of the WME/IMG sharply dispute that assessment, noting that they still have long-term contracts with 80% of America’s top university sports programs. “College is a strong business and an excellent complement to our offerings across music, digital, food, original content and event activation,” says Jason Lublin, WME/IMG’s chief operating officer, adding that the company’s portfolio is “unmatched in our industry.”
Even critics agree that IMG College remains a formidable business.
Still, the rough ride in college sports epitomizes the kind of challenge that Hollywood’s big agencies can confront as they pursue an industry-wide imperative to diversify. Private equity investor Silver Lake Partners, majority owner of WME/IMG, has bet big that the Hollywood agency’s headlong plunge into sports will end with a handsome payoff, perhaps with an oft-rumored public stock offering.
The firm’s sports division arrives at this heady juncture from modest beginnings.
Cleveland lawyer Mark McCormack made a handshake deal in 1960 to exclusively represent a golfer named Arnold Palmer. Over the decades, the company that became IMG would add athletes, artists, fashion models and — after a series of acquisitions in the 2000s — firms that helped colleges profit on everything from their logos to stadium naming rights, as well as radio and TV broadcasts.
One expert put the aggregate equity value of those rights at north of $2 billion, money that helped IMG thrive. But colleges increasingly are fighting to keep a bigger slice of the pie, so that they can build mega-stadiums, hire star coaches and field the winning teams their fans demand.
IMG until recently had only one large competitor in the field, Learfield Sports of Plano, Texas. The two agencies still represent nearly 90% of the 65 schools that make up America’s five most powerful sports conferences. And as of September 2013, Learfield has had private equity owner Providence Equity Partners pushing for better returns on its investment.
But some college clients have come to believe that private equity control of the agencies has led to cost-cutting and bottom-line imperatives that do not serve them. IMG College has been the biggest target of such complaints.
“We didn’t feel like they were giving us fair value, and we went around and around and around with them,” says one top collegiate official, who asked not to be named. Adds a representative of another college sports powerhouse, “There was a growing feeling in the marketplace they were not giving enough attention to their clients.” But an adviser to many colleges said the “grinding down” of relationships preceded the merger of WME and IMG. More recently, the source said, “The new management at WME/IMG is getting good reviews … and those client relationships are recoverable.”
What could be more problematic in the long term is a fundamental change that some college presidents and athletic directors are demanding: They want to keep for their schools money the intermediaries are now banking. Last October, Arizona State U. kicked out IMG and took the business inhouse, saying the agency had failed to maximize revenue for the university. That makes it the country’s only big-conference college to break away — and stay away — from agency support.
A more threatening change could come if entire sports conferences drop agency representation when their current contracts expire. A review by the Pac-12 Conference claimed each school could net an additional $2 million a year via such a move. That figure has been challenged by the agencies, which note that conference schools have received millions of dollars less annually from the conference-managed Pac-12 Network than comparable revenues received by schools belonging to agency-managed channels for the Southeastern Conference and Big-10.
Still, the Pac-12 announced June 7 that it had created a sales unit to help schools that want to sell their own multimedia rights. Schools will continue to have the option, however, of using agents like IMG College.
AJ Maestas, president of Chicago-based Navigate Research, which advises many top universities, says he understands the drive for schools to sell their own media rights, but suggests the process will be complicated. “Universities can’t hire and fire as readily and pay big commissions,” he says. “They can’t have a rock-star sales person who makes more than the head of the College of Letters. … Historically, the outside firms have outperformed the universities.”
But the big agencies are also being challenged by upstarts like JMI Sports, bolstered in 2012 when it recruited former IMG executive Tom Stultz. The San Diego-based company took one of the choicest prizes in the collegiate arena — Kentucky — away from IMG, with a blockbuster $210 million offer last August.
In May, WME’s archrival, CAA, bought another small but growing competitor, Atlanta-based sports licensing agency Fermata Partners. In the less than three years since its formation, Fermata has signed licensing deals with Miami, Oregon and Georgia. On July 1, it made its most recent splash — signing collegiate titan Notre Dame.
WME execs depict the business landed by rivals as an exception to the rule, saying: “In the past year, we have signed or renewed more than 60 college deals so, at the end of the day, nothing that dramatic has changed.”
Agencies typically sign licensing and media deals with universities for 10 years or more, and offer yearly guarantees that the agencies must exceed in order to profit. To keep some of its clients, IMG College has paid big numbers — an added $21.5 million over six years, for example, to keep the U. of Nebraska in the fold.
Its rivals say the industry giant badly overpaid, and will have its profit margin pounded down or eliminated by such deals. IMG College officials denied that assertion, and privately leveled the same analysis at JMI last summer over the Kentucky deal.
Debt holders have pressed for cost reductions promised at the time WME co-CEOs Ari Emanuel and Patrick Whitesell pushed through the acquisition. The new company pledged $150 million in reductions over five years, but didn’t make even a $10 million dent in that vow in its first year, say several individuals familiar with the transaction.
The agency’s executives don’t dispute that cost cutting has been a challenge, but say they have been making progress on the issue. One top insider conceded that the “effervescence” of past projections for IMG College had dissipated, blaming the leadership of pre-merger IMG for “selling us on an overly optimistic set of promises on College.”
Now, when asked about powerhouse revenue potential, WME executives are more likely to point to, say, a new deal that has the firm representing Anheuser-Busch, with its $1.5 billion annual ad budget, or WME’s winning bid to sign Visa as the credit card giant hunts for sponsorship options at the Olympics, World Cup, NFL games and other big events.
A top WME/IMG executive wonders why journalists keep asking about college sports, the one sector he describes as “doing the least well,” adding: “That represents one-fifth of the company’s business (profits). The other four-fifths is doing really well to extraordinarily well.”
Given the big promises of the past for college sports, another WME/IMG executive’s words marked a stark turn back to the future. He claimed the entire firm’s earnings jumped nearly 27% in the first quarter, headed for a projected annual advance of 30% in 2015. And leading the way with big profits, the exec said — WME’s traditional agency operations.