With IMG Deal, WME Surpasses CAA in Size – But at What Cost?

With IMG Deal, WME Surpasses CAA in Size – But at What Cost?

The combined forces of WME and IMG create the largest agency in the space

With WME's acquisition of sports behemoth IMG on Wednesday, the Hollywood agency landscape has undergone a seismic change overnight — one that catapults the No. 2  talent representative past its rival CAA to become the largest in the industry.

The combined forces of WME (focused on Hollywood talent deals) and IMG (the largest sports agency in the world) creates the largest agency on the sports and entertainment landscape when measured by annual revenue and number of employees.

But at what cost?

Also read: WME $2.4 Billion Bid for IMG One Third Higher Than Next Bidder, Says Insider (Exclusive)

Like Endeavor's 2009 takeover of William Morris, this is the minnow swallowing the whale — only more so. WME paid $2.4 billion for IMG, far more than either agency is worth.

When private equity firm TPG Capital invested $350 million in CAA in 2010, it valued the agency at more than $1 billion.

Media reports put CAA's revenues at about $300 million in 2010, and it has grown significantly since then. WME's current annual revenue falls shy of that, but not if you factor in IMG's annual revenue, which is north of $1 billion.

In the area where the two agencies compete head to head – the entertainment industry — CAA remains dominant, with more major stars and talent in its stable than WME. CAA also surpasses IMG in negotiating athletes on-field deals, an area where Forbes recently ranked them first by a wide margin.

Yet IMG is dominant in marketing and licensing deals for college sports, where CAA does not compete. It also has a robust business in sports television production, event management and fashion.

The combined WME-IMG will have more than 3,000 employees in cities around the world, compared with CAA's 1,500.

To carry the biggest stick on the block, WME's Ari Emanuel has had to borrow an estimated $1 billion, leveraging the company in a way that will have huge ramifications for its agents and clients.

Much of the new company's annual cash flow will need to go to servicing that debt, meaning WME may have to divert money it makes representing Christopher Nolan and The Rock to finance the deal.

“They get one day to thump their chest, but they paid a lot for the privilege of thumping their chest,” a prominent industry executive told TheWrap.

Debt of that magnitude will exert tremendous pressure on WME's other businesses, namely its entertainment divisions.

“There will be a lot of partners and agents who are going to make a lot less money,” the individual said. “Some will wrap their head around getting equity in a bigger thing and decide it's a good trade. But there will be a lot of people who make less for a long period of time.”

Some senior agents will have to decide whether they want to be agents or executives at a media company. Talent representation constitutes less then 10 percent of IMG's business, and while WME says the two businesses will remain separate for now, some WME agents will certainly move over to IMG.

And while IMG is still growing, most consider it a mature company.

Also read: Whodunit? Rival WME Launched CAA ‘CAAN'T’ Mystery Campaign

It may all be worth it to an ambitious builder who has been so focused on beating CAA that he wallpapered the Century City mall with a mocking message earlier this year. Emanuel and his partner Patrick Whitesell have been locked in an arms race with CAA since the merger of Williams Morris and Endeavor in 2009.

“From WME's perspective, it's hard to grow beyond just an agency,” an executive familiar with IMG's books told TheWrap. “IMG is an opportunity to get global in terms of scale and relevance. The challenging part is attention could be diverted from the core business. They have never run businesses like this.”

  • Nikki

    Sharon, where did you come up with this nonsense? AE didn't borrow a billion dollars to fund this acquisition; Silver Lake wrote the check. And it's a small deal for them. Less than 1/10 the cost of its recent Dell takeover. Silver Lake will own a much bigger piece of IMG for putting up the cash, but that doesn't mean WME will be diverting revenues to service the debt. And “some WME agents will certainly move over to IMG.” Where'd that come from?

    • http://www.thewrap.com TheWrap

      thanks for writing. no one makes purchases of this size and pay cash, certainly not PE firms. more typically is they put up 30% in cash and borrow the rest. in this case, my information is that they're likely putting up more than 50% in cash, which means about $1 billion in debt to service. this piece is informed by two sources close to the deal and numerous other financial/ industry experts. happy to learn more if you know more. sw.

      • Nikki

        SW — my point is that the funds aren't coming out of WME's coffers. They didn't make a financial investment; as Venit and Rosen told staff today, this was a strategic investment. Silver Lake wrote the check for WME to buy IMG, which perhaps gives it a bigger stake in WME, but not to the point where WME revenue will be used to service the debt — at least not in anyway that will affect the agency's profits.

      • Jon

        Any agent who moves from wme to IMG is committing career suicide.

  • piratesareeverywhere

    Anyone who can borrow large amounts knows that it is time to buy everything that he can so that he can pay it back later with vastly-devalued dollars. Ari's no dummy, and more importantly, he has the connections needed to get the skinny on what is on the horizon.

    So saddle up peons, and get out of those cash positions. Now is the time to take on debt, especially if what you are financing is a tried-and-true, revenue-generating product that the moronic masses revere as an indespensible sacred cow.