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How Endeavor’s IPO Became a Focus of the Bitter WGA-Agencies War

It was a move Endeavor had to make.

Once the talent agency embarked on a multibillion-dollar acquisitions binge, making splashy deals for sports agency IMG (bought for $2.3 billion in 2014) and mixed martial arts company UFC ($4 billion in 2016), an initial public offering became inevitable. As the company piled on debt and took in new investors during the past seven years to fuel its growth strategy, it was clear to observers that the pressure to deliver returns would lead it to the markets.

What no one could have predicted back in 2012, when private equity firm Silver Lake first put money into what was then WME, was that Endeavor’s IPO would be threatened by a head-on collision with a militant Writers Guild of America dead set on upending decades of industry tradition and a reliable source of riches for Hollywood’s largest talent agencies. The fight over packaging fees and agency-affiliated production that simmered for more than a year has exploded in recent weeks into a storm of litigation and jockeying between agencies and their former clients in the creative community’s court of public opinion.

Instead of a coronation of Ari Emanuel, the CEO who built Endeavor from its humble beginnings in 1995 as a start-up talent agency, the launch of Endeavor’s IPO process in May has opened the company to tough scrutiny of its finances and the strategy underlying the buying spree of the past few years. The firm hopes to grow beyond its talent agency roots into the big leagues of publicly traded media and content companies.

But the response on Wall Street to the disclosure of Endeavor’s financial data for the past three years has been tepid. The numbers in the prospectus filed with the Securities and Exchange Commission on May 23 show a company grappling with the impact of a slew of acquisitions, large and small, which have made for a messy balance sheet. Endeavor took a generous helping of exclusions in calculating its adjusted earnings before interest, taxes, depreciation and amortization for 2016 through the first quarter of 2019. The financial disclosures reveal that the company is still in capital-intensive building mode and is shouldering a high debt load of $4.6 billion.

“They’ve had an uneven record of success with respect to their net income and losses,” says Gene Del Vecchio, author of “Creating Blockbusters!” and an adjunct professor at the USC Marshall School of Business. “If you’re an institutional investor or a large pension fund and you’re thinking, ‘Where should I put my next $100 million?’ well, you have a lot of options. It’s a robust time for IPOs. You could put your money in Endeavor or you could put it in some biotech company.”

Endeavor can’t afford to emerge bloodied from a high-stakes fight with the WGA that threatens a crucial WME client base and source of profits. And it promises to rack up legal bills at least in the short term. Packaging-fee income is estimated to be worth tens of millions of dollars a year to WME, according to industry sources. That’s a small portion of the $1.3 billion in revenue generated by Endeavor’s representation unit in 2018 (which includes the production activity of the Endeavor Content division), but packaging-fee income is surely a significant portion of the division’s $335.2 million in earnings before interest, taxes, depreciation and amortization, according to the prospectus Endeavor filed on May 23.

Revenue and adjusted EBITDA in the Representation division have been growing by double digits since 2016, but that hasn’t been enough to offset losses for Endeavor as a whole as it invests in start-up operations like Endeavor Content. Endeavor posted a net loss for 2016 ($98.3 million) and 2017 ($173.1 million), while 2018’s profit of $231.3 million was fueled by a $400 million windfall from the sale of rights unit IMG College.

Moreover, a key strength of WME has been its impressive roster of writers, most of whom left the company in April as part of the WGA-mandated exodus of writers from agencies that refuse to adhere to the guild’s crusade to ban packaging fees. Also prohibited: agencies affiliated corporately with production-distribution operations.

The guild’s battle with Hollywood’s largest talent agencies has moved into an even more hostile phase now that WME, UTA and CAA have filed separate federal antitrust lawsuits against it. The WGA lobbed the first legal salvo in April with a lawsuit filed against WME, CAA, UTA and ICM. At the heart of the dispute is a fundamental dispute about the depth of the guild’s authority to regulate how outside entities represent WGA members.

With a public offering looming on the horizon, Endeavor has the most to lose in the short term. Endeavor declined to comment on this story, citing the mandatory quiet period before its IPO.

“It’s a risk factor for investors,” says Hal Vogel, head of Vogel Capital Management. “It creates a lot of uncertainty about the company’s valuation, and it raises questions about an important part of its business, one that’s been very profitable for many years. You can’t just dismiss it as a minor lawsuit.”

It’s unlikely that WME or any other agency will emerge from the fight looking stronger. If the lawsuits drag on, that will cost all parties millions of dollars in legal fees while agencies gradually take a hit from the loss of writer clients. Any settlement will likely require the agencies to make financial concessions.

Endeavor’s drive to keep growing has made WME the prime agency target for the WGA in its extraordinary campaign to rally members around the cause of reforming the rules that govern talent agents who represent WGA members. The guild has flexed a level of muscle that surprised the industry, as more than 7,000 members have complied with the WGA’s directive to fire their agents as of April 13.

Moreover, the WGA’s campaign has highlighted the industry’s focus on the role of private equity investment in talent agencies. Guild leaders argue that this has pushed agency leaders to prioritize predictable profit streams from packaging deals rather than fight for higher individual writer salaries. WME and Endeavor already checked all of the WGA’s boxes as attack targets as the guild went on the offensive against agencies. But the timing of the launch of Endeavor’s IPO process was a gift to the WGA. Endeavor is now much more vulnerable to PR pressure as it tries to persuade investors to bet on the company’s growth strategy.

“There’s a volatility to the representation business that makes it unique. You’re dealing with a resource, in terms of talent, that can leave you on the whim of human emotion.”
Keyvan Peymani, Salem Partners

“When they do their roadshow, they’re going to face questions from investors,” says Keyvan Peymani, managing director of Salem Partners. “They’re going to want to hear that they’re taking immediate action to get some kind of resolution. There are going to be concerns about what losing clients means for them. There’s a volatility to the representation business that makes it unique. You’re dealing with a resource, in terms of talent, that can leave you on the whim of human emotion.”

Endeavor is pitching itself to Wall Street as a unique platform comprising sports, entertainment, media, live events, marketing and sponsorship. The company’s relationship to talent through its WME and IMG agencies is a key selling point as a source of IP, talent and material that can be exploited through Endeavor’s disparate operations. Mixed martial arts giant UFC is the largest operation under the Endeavor umbrella. Endeavor’s underwhelming financials at present mean that investors will have to bet on the ability of Emanuel and Endeavor executive chairman Patrick Whitesell to bring the company into the black.

“The question investors have is, where are the earnings going to come from?” says Mike Ozanian, co-host of “Forbes Sports Money” on Yes Network and assistant managing editor of Forbes magazine. “If [Endeavor] is such a great platform, why is it not making money?”

Lisbeth Barron, a veteran banker who is chairman-CEO of Barron International Group, predicts there will be demand among certain investors for Endeavor shares.

“You have to find investors who are comfortable letting the company swing for the fences,” Barron says. “This is not a subtle (growth) strategy. And investors have to be willing to deal with highly complex financials and volatility.”

After crunching the numbers in Endeavor’s prospectus, Barron said it appears that the company’s core continuing operations have generated organic EBITDA growth of 6%-8% a year over the past few years. The high leverage ratio could be concerning to potential investors, but the breadth of operations is attractive.

“They’ve made a judgment they want to be a unicorn and be the leading player throughout all these sectors,” Barron says. “They will either be really right or they will have to retrench in a big way if cash flows can’t support the growth strategy.”

The WGA has already moved to highlight the impact of its campaign in a letter sent June 24 to the Securities and Exchange Commission questioning the accuracy of Endeavor’s statement in the prospectus that it has “more than 6,000” clients in its representation unit, which encompasses WME and IMG among other units. The WGA said it has handled termination letters from at least 1,400 WME clients since April 13, when the mandate to fire agents came down.

Endeavor responded with a statement noting that the “more than 6,000” figure is still accurate despite the loss of writer clients. “Once again, in an attempt to disrupt our business, WGA leadership is misrepresenting the facts,” Endeavor said. Last week the WGA sent another missive to what the guild said was hundreds of institutional investors highlighting the risk factors of the agency impasse to Endeavor.

Endeavor is the white whale for the WGA in its agency campaign. But there’s an even bigger concern on the horizon for Hollywood talent agencies. A fired-up WGA is heading into master contract talks next year with the Alliance of Motion Picture and Television Producers. In recent weeks there has been talk in the creative community of studios looking to stockpile TV and movie scripts in anticipation of labor strife if the WGA comes in hot with a list of financial demands. A long work stoppage would be debilitating even for the largest agencies, which are already grappling with the loss of writer clients.

Endeavor may be riding through a rocky patch at present, but Emanuel by many accounts has no intention of backing down from the WGA fight. It was no accident that WME was the first of the agencies to hit the WGA with a federal antitrust lawsuit.

“Ari is pissed,” says a source close to Endeavor’s CEO, who described the atmosphere at WME as “tense” in recent weeks given the collision of the WGA’s agency campaign and Endeavor’s IPO. “None of it is going as planned.”

Other sources close to Endeavor dispute that the WGA’s campaign had any impact on the IPO process or its timetable. The company is confident in its legal strategy under the direction of attorneys Jeffrey Kessler and David Greenspan of Winston & Strawn, who are known for handling anti-trust cases for labor organizations such as the NFL Players Assn.

For Endeavor co-founder Ari Emanuel, the IPO is meant to be a crowning achievement that fuels the firm’s ambitious plans.
Mediapunch/Shutterstock

The dueling legal strategies in play as the agencies and WGA duke it out raise larger questions about the responsibilities of talent representatives and the nature of how writers are compensated for their work. The litigation has also renewed the debate about whether showrunners, who wield the power to hire and fire and set salaries, should be considered management or labor.

In angling to ban the spread of agency-affiliated production operations, the guild maintains that packaging fees are an inherent conflict of interest because agencies are paid by the production entity rather than through the standard 10% client compensation. That percentage is waived when an agency receives a package deal. Because packages come with a stake in the show’s backend profits, the WGA asserts that agencies become part owners of the show, and thus have no incentive to push for higher salaries and compensation for their clients who work on the show.

“Agents want to make as much money as they can,” says Christine M. Torres, a writer whose credits include “Law & Order: SVU.” “That’s not unheard of. That’s a basic tenet of capitalism, but they’re doing it on the backs of their clients.”

In its legal filings and communication to members the guild has listed a litany of harms from packaging — from agencies making more on shows than clients to agents steering projects to the companies that promise the highest packaging fee. There are instances in which the agency receives its backend profit participation stake before its clients are paid, which has the effect of shrinking the pool of profits from which the writer’s share is calculated. Agencies point to the standard waiver of 10% commissions for all clients working on packaged series as indisputable evidence that packaging has tangible financial benefits to writers and others.

After a fitful series of negotiating sessions with the Assn. of Talent Agents over the past five months, the WGA formally broke off talks with the ATA on June 19. WME filed suit in Los Angeles federal court on June 24. The complaint accuses the guild of violating the restraint-of-trade terms of the Sherman Act by organizing an unlawful “group boycott” of the agencies and for taking a “refusal to deal” stance on its agency franchise reform effort. WME also asserts the WGA has exceeded the bounds of its antitrust exemption as a union with some of its actions. UTA filed a similar suit on June 27. Both suits are an echo from the distant past. WME predecessor William Morris Agency used a nearly identical argument in 1975 when it sued the WGA over an earlier effort to kill off packaging fees.

David Goodman, president of the WGA West, says the guild is still willing to negotiate, albeit on an individual basis with agencies rather than through the ATA.

“If the agents could present another basis for negotiation around the idea of packaging fees that address our conflict concerns, we’d absolutely be happy to talk about it,” says Goodman. “The agencies are taking the tack of trying to hold on to the status quo. They don’t want anything to change.”

The increased volume of TV series production and the concentration of top industry talent in a handful of large agencies has combined for boom times in commissions, as agencies have more writers, actors and directors working in TV than at any point in history. Commissions become more valuable as backend profits are dwindling for the shows that never achieve hit status. Without big profits to carve up in success, packaging-fee income largely amounts to 1%-3% of a show’s production budget, per episode. In recent years, some packaging deals have shifted to a flat per-episode fee. WME in its complaint noted that over the past five years only five series on ABC, CBS, NBC or Fox have generated backend profits.

Despite the changes, the potential to field a “Big Bang Theory”-level smash in syndication still exists, and thus the agencies are loath to submit to a blanket ban on packaging. Also for agencies, there are big concerns that if the WGA flexes enough muscle to eliminate an age-old industry practice, the emboldened guild will force other changes, such as mandating a cut in the standard 10% commission fee in exchange for representing WGA members.

“WGA’s absolute bans on agency packaging and content affiliates are thus grossly over-restrictive, unnecessary to redress any legitimate union concern, and intrude upon commercial activities in markets that WGA has no authority to regulate,” WME’s filing states. “Moreover, WGA’s actions will not only harm the economic interests of its own writer-members, including the showrunners who work as producers, but they will also harm the economic interests of talent represented by other entertainment guilds (e.g., actors and directors) who want to benefit from packaging and agency content affiliates.”

The WGA’s aggressive stance with agencies over packaging and affiliated production has spooked others in the creative community. Talent managers worry that the guild will next take aim at the producing fees that numerous top managers command as part of deals involving their clients. Lawyers have been caught in the middle with increased demands for dealmaking and client services now that agents are sidelined.

The agents are not alone in worrying about the ambition of WGA West executive director David Young, who has assailed the agency world as corrupt and collusive. Some see Young as vying to increase the guild’s clout by making the WGA the primary conduit to employment for its members. One observer likens it to the high level of control that the NBA exerts over agents for professional basketball players.

“David Young is trying to change too much too soon,” says a senior agent at a Big Four agency. “That’s not how the world works.”

Phyllis Nagy, a writer and director who earned an Oscar nomination for her adapted screenplay for 2015’s “Carol,” teamed last month with fellow scribe Andy Bobrow to launch a Go Fund Me campaign to help cover COBRA insurance costs for WGA members who didn’t earn enough in the quarter ended June 30 to have their guild health insurance continue through the fourth quarter of this year.

The fund surpassed its $25,000 goal in a matter of days and as of July 8 had topped $44,600. Bill Prady, co-creator and exec producer of “The Big Bang Theory,” donated $10,000.

Nagy, who had been with UTA, has been vocal about her concerns about the WGA’s handling of the agency impasse.

“As a guild member I have questions about why we’re fighting and for what,” Nagy says. “I think today we are exactly where I thought we’d be three months ago.”

Nagy said she’s encouraged by indications that some of those running for board and officer seats in the WGA West’s September elections will bring fresh perspectives. “I think some people who have declared (as candidates) are eager to find a negotiated solution,” she says.

The DGA and SAG-AFTRA have stayed quiet in what is a tricky situation for both unions. Both have many members who have benefited from packaging over the years by saving 10% of their income when working on packaged shows. The major studios have also kept their heads down during the fray, as they have no incentive to hand a win to either the WGA or the talent agencies. The Alliance of Motion Picture and Television Producers squarely rejected the guild’s long-shot bid in March to have its agency reforms added as a clause in the current master contract that runs through May 1, 2020, with contract talks just around the corner.

“If the agents could present another basis for negotiation around the idea of packaging fees that address our conflict concerns, we’d absolutely be happy to talk about it.”
David Goodman, WGA West president

As the WGA and agencies dig in for battle, the agencies have the benefit of deeper pockets and the certainty of continuing to earn package fees from pre-2019 projects for decades to come. But the guild has leverage too. Young’s regime has built an impressive level of solidarity and organization from WGA members at all levels. Opposition to the agency campaign created fissures among guild members, many of whom are steamed at having to fire their agents. But broadly, among the rank and file and showrunners alike, there remains a deep undercurrent of support for Young, who led the guild through the 100-day strike that began in November 2007. Many are quick to express admiration for Young and Goodman for taking on what one guild member called “the lonely fight” against the longtime bête noire of packaging.

“In every meeting I attended, the union was very straightforward that this attack would be multipronged — it would include litigation and us being asked to leave our agents,” says Patrick Meighan, an executive producer of Fox’s “Family Guy” and a “contract captain” organizer for the WGA in the agency campaign.

For Meighan, the drive to ban packaging is a question of ethics and self-interest. His salary on “Family Guy” has been “frozen” for six years, he asserts. He was, until recently, repped by WME, the agency that also packaged the long-running Fox animated series.

“If my agent has been trying very hard to increase my salary on my behalf, I certainly haven’t seen it,” Meighan says. “I really respect the leaders on the negotiating committee and on the board for being willing to take on a very lonely fight against incredibly powerful and entrenched interests.”

Gerald Ford was in the White House the last time a federal judge examined legal arguments for and against packaging fees. In December 1975, William Morris Agency sued the guild and sought an injunction against the enforcement of its newly enacted ban on such fees.

Judge Harry Pregerson, a renowned jurist from California’s famously liberal Ninth Circuit, came down with a decidedly mixed decision that denied the injunction request but also laid out the steep list of questions that would have to be addressed if the case proceeded to trial.

“Is the Guild a group of employees or independent businessmen; did the Guild combine with a nonlabor group [in violation of union antitrust exemptions]; does the Guild have a legitimate labor-related interest in eliminating package commissions; does [the ban] protect wages or fix prices,” Pregerson wrote in his March 1976 decision on the injunction. At the same time, he observed, “Morris has not demonstrated a likelihood of proving that [the ban] gives the Guild market control beyond that needed to further its legitimate interest in maintaining the wages of its members.”

Within a few months of that ruling, the lawsuit was settled and the guild begrudgingly established an agency franchise agreement that allowed packaging. That deal was untouched for more than 42 years. In a quirk of fate, the current leadership regime at the WGA West began planning the latest effort to outlaw packaging around the same time Endeavor began planning in earnest for its IPO. In entertainment and investing, timing is everything. But the timing may not be entirely bad for Endeavor.

“Just when the world is going the tech route, here’s a group which is consolidating assets that are anti-disruptive — sports rights and other kinds of filmed and location-based entertainment, including festivals and fashion, are all pretty insular,” Barron says. “In some ways, it is a safer bet than trying to predict the next trends in digital media. I understand what they’re trying to do here.”

The battle between the guild and the agencies could have other consequences. If screenwriters and showrunners continue to stay away, mid-sized and smaller agencies will have no choice but to let go of some writer-focused agents. And even those who manage to avoid being pink-slipped may see opportunity in the chaos. There’s little to prevent some ambitious agents from striking out on their own, offering to forgo packaging fees if it means a chance at doing business with high-profile scribes while the legal battle rages.

“This is a time of tremendous change,” says Del Vecchio. “It could be that the decisions that are made over the next six months alter the way that talent agencies operate for the next several decades.”

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