Investors hold key to IMG future

Ted Forstmann left a clear, final order for IMG senior management before his death: Do not sell the company.

It’s an order that IMG’s senior management hopes to fulfill, but their ability to do so requires a commitment from the limited partners that invested in Forstmann Little’s final fund, which bought IMG for $750 million in 2004.

Limited partners like GE Pension Fund, United Technologies and JPMorgan Chase all have an option — after Forstmann’s death — to force a sale of IMG. They also have the right to force a sale by July 2012, which was the date they were due to see a return from their investment with Forstmann Little. Sources familiar with both clauses expect the limited partners to opt not to exercise the trigger clause after Forstmann’s death, averting an imminent sale, and anticipate they will extend next July’s sell-by date through a majority vote that further postpones a sale of IMG.

Mike Dolan, named CEO and chairman of IMG last week, has spent months meeting with the company’s limited partners. Photo: IMG

Mike Dolan, who was named CEO and chairman of IMG last week, has spent the last six months meeting with the limited partners to get their support in postponing a sale, said Jim Gallagher, IMG’s spokesman. He said that Dolan had met with all of the largest limited partners more than once since Forstmann was diagnosed with brain cancer last May. He offered them the option to sell their individual stakes but encouraged them not to sell because the return on their initial investment would be greater if the company continued to increase its revenue.

“There’s nobody getting out,” Gallagher said. “The story is just too compelling a story.”

Gallagher said that IMG is on track this year to have $140 million in earnings before interest, taxes, depreciation and amortization (EBITDA), an accounting measurement used to determine the value of a company prior to a sale. He added that the goal is to have EBITDA of $170 million in 2012 and more than $200 million in 2013.

“At $200 million of EBITDA, IMG is worth vastly more than it is today and at that point we can do a variety of things,” Gallagher said.

With time, IMG management plans to pursue a sale that offers shareholders the biggest return on their investment, Gallagher said. That could take a variety of forms, and not happen for a number of years.

Dolan already has spoken to limited partners about the possibility of a public offering of IMG. The company early next year plans to file a form S-1 with the Securities and Exchange Commission, which will make the company’s basic business and financial information public and pave the way to a potential IPO.

The company also could look to sell to a cash buyer. Former Yahoo! CEO Terry Semel reportedly approached Forstmann about buying the company several times. Lagardère has said publicly it would like to buy IMG, and Ari Emanuel’s Hollywood agency WME has been mentioned as a potential buyer in recent years. Other potential buyers, or investors should one of the limited partners exit, might be IMG’s joint-venture partners in India, Mukesh Ambani, and Brazil, Eike Batista, two of the world’s wealthiest men.

Alternatively, Gallagher said that IMG could take on a minority investor or break up individual pieces of its business like the college or fashion enterprises and sell them independently.

“We wouldn’t rule anything out,” Gallagher said. “The goal is to deliver the greatest value to shareholders at the appropriate time. How we do that — if you can dream it, we will consider it, as long as it delivers the highest shareholder value. That’s the ultimate goal.”

GE Pension Fund declined to comment, and other institutional investors could not be reached for comment before deadline.

IMG has met with investment bankers in the past and was valued at more than $1.5 billion by Goldman Sachs in 2007. If its EBITDA increases to $200 million by 2013, financial sources said it could fetch as much as $2.4 billion.

“They don’t want to have the perception in the market that it’s a forced sale because of the death of an owner,” said Rob Tillis, managing partner of Inner Circle Sports, an investment bank that specializes in sports, media and entertainment. “It’s a good business. Is next year going to be a lot better than this year? They obviously think so. A lot will depend on the economy, what happens in Europe and so forth. There could be headwinds, but they have a stable broad-based business.”

Forstmann began planning the future of IMG before he ever underwent surgery on the brain tumor he was diagnosed with last spring. He hired a Washington, D.C.-based attorney, Mark MacDougall of Akin Gump, who was appointed to IMG’s board to protect Forstmann’s interest and shares in the company. (Forstmann is the company’s largest shareholder.)

“Ted left a very clear, easy-to-follow blueprint that he developed with Mike [Dolan] for the future of this company,” Gallagher said. “It starts with the premise that IMG is not for sale today. Mike is now charged with bringing to reality the [international] joint ventures Ted set in motion, the continued growth of IMG College through George [Pyne] and the continued growth of IMG’s legacy businesses: golf, tennis, clients and events and federations.”

Dolan has made it clear that he will go to great lengths to follow Forstmann’s instructions and prevent a premature sale of IMG. Vanity Fair, which first reported the trigger clause in the limited partners’ contract after Forstmann’s death, wrote an article for its January edition detailing former IMG board member Michael Ovitz’s effort to secure financial information about IMG’s compensation and retention program. Dolan and other board members interpreted Ovitz’s request as a move to get financial information in order to buy or force a sale of the company and pushed Ovitz and three other board members to resign in October.

In a letter to IMG staff after Forstmann’s death, Dolan asked that staff honor Forstmann’s legacy by “working together to take IMG to new heights in the years to come.” Pyne, IMG’s president of sports and entertainment, said the company will do that by focusing on its international endeavors in China, India and Brazil, its growing college business, media production and distribution and its other businesses.

“Ted put forth a very clear succession plan and we’ve been operating in that fashion for the last five to six months,” Pyne said. “Operationally, you’re going to see us continue with that plan. There aren’t going to be any major shifts. Ted had very big goals for this company and we’re well on our way to achieving them, but we’re not done yet.”