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From revenue to realignment, Abe Madkour and Tripp Mickle take a look at what the documents show about the merger of WME and IMG.
The total was outlined in financial reports shared with lenders in late February and obtained by SportsBusiness Journal. The documents offer a rare, inside look at the financials of each company and break down individual business units while mapping out WME’s plan to leverage its massive $2.375 billion acquisition. The specific figure of projected cost cuts is $51 million more than the $100 million that Moody’s Investors Service projected WME would cut from IMG after acquiring the company.
INSIDE IMG: THE FINANCIALS
Revenue By Division
Year College Media & Entertainment Sports Total 2011 $331 $410 $618 $1,380 2012 $349 $446 $571 $1,389 2013 $487 $448 $626 $1,567
Note: Compound annual growth rates, 2011-2013: IMG College (9%), IMG Media (16%), IMG Sports & Entertainment (1%), total (7%)
2013 Revenue By Business Unit
IMG College Multimedia: $435 Licensing: $32 Business ventures: $20 Total: $487 IMG Media Rights acquisition and distribution: $273 Sports production: $160 Other media ventures: $14 Total: $448 IMG Sports & Entertainment Events and federations: $153 Fashion: $112 Golf: $97 Tennis: $90 Performance: $83 Consulting: $36 Licensing: $35 Clients: $20 Total: $626
Note: In millions; revenue from other divisions not separated out.
Source: IMG lending documents, as acquired by SportsBusiness Journal
2013 Cost Base
Cost of Goods Sold Rights and guarantees: $449 Player fees and prizes: $66 Remaining cost of goods sold: $417 Overhead Corporate (non-allocated): $78 Corporate (allocated): $76 Remaining SG&A: $313 Total Costs: $1,399
Note: In millions
Industry observers have questioned how WME could make the acquisition work at such a high purchase price and many have wondered how the company realistically could cut such a large amount of expenses from a combined company. The documents detail that plan for the first time.
Cutting costs is critical to WME’s efforts to make the IMG acquisition work. It hopes by doing so it can increase margins at IMG on earnings before interest, taxes, debt and amortization (EBITDA) from 12.4 percent to 22 percent, according to the documents.
IMG’s total expenses for 2013 are listed at $1.4 billion. The bulk of the cost cuts outlined would be made over the next year when WME hopes to slash $122 million from IMG’s expenses by consolidating operations, reducing vendors, cutting staff and eliminating excess office space. The remaining $29 million in cuts are expected to come from sales force realignment and media contracts, according to the documents.
The report says the cuts will come in waves. WME expects to cut $14 million from the business in the first six months by reducing aircraft, corporate and consulting expenses. Over the following three months, it expects to cut $55 million by restructuring the organization and cutting costs from its events, client and production businesses. By the end of the first year, it expects to eliminate another $53 million in costs through indirect spending cuts, finance cuts, human resources cuts and college contracts. It then plans to cut the additional $29 million by the end of 18 months.
WME also plans to cut $5 million of costs by reducing overhead at its own agency, which will bring total cost reductions to $156 million, according to the report shared with lenders.
“Given the necessity for cost savings as a key consideration for the investment rationale, we believe management will be aggressive in its efforts to achieve lower costs,” Moody’s analysts wrote in a credit opinion issued Feb. 27.
According to the report to lenders, the combined company will have a value of $3.5 billion. Silver Lake Partners will own 50 percent, WME will own 47 percent and the Abu Dhabi-based sovereign wealth fund Mubadala Development Co. will own 3 percent, according to the documents.
A total of $2.35 billion of debt was raised and $1.48 billion in equity was contributed to finance the acquisition and recapitalize the combined companies. Silver Lake and Mubadala contributed $461 million in new equity, while WME rolled over $1 billion in existing equity. More than $200 million in cash remains on the balance sheet.
In addition to detailing how the deal is being financed and what costs WME plans to eliminate, the documents underscore just how much larger IMG is than WME and shed light on some of WME’s plans for increasing the new, combined company’s revenue. They also shed light on the business results of IMG’s various divisions, which have long been speculated but never revealed, including details of its 7-year-old IMG College unit, as well as IMG Media and even down to its consulting and talent practices.
WME co-CEOs Patrick Whitesell (left) and Ari Emanuel
Photo by:AP IMAGES
The acquisition by the smaller WME of the larger IMG is reminiscent of the smaller Endeavor agency’s acquisition of William Morris Agency in 2009. Endeavor’s co-CEOs, Ari Emanuel and Patrick Whitesell, spearheaded that acquisition and cut $50 million in costs from the combined company. They also spearheaded the IMG acquisition and the document says that if they could remove $50 million in costs from a “company one-eighth the size of IMG,” then they should be able to cut $100 million more from a company as large as IMG.
According to the documents, WME is confident it can achieve the $151 million in cuts because IMG historically has been focused on “growth and expansion over margin and profitability” and has a “siloed, decentralized” corporate structure. AlixPartners and Accenture, whom WME hired to evaluate IMG’s business, agreed, the report says.
The documents don’t go into great detail about WME’s plans for increasing revenue at WME/IMG. It plans to reinvigorate IMG’s client representation business in golf, tennis and other areas by leaning on WME’s track record in client representation, and it plans to consolidate sales forces and develop a bonus structure that improves sales results.
Regarding IMG College, which generated $487 million in revenue last year, WME believes it’s an undervalued space and sees an opportunity to increase advertising rates that are a third of the prices for professional sports. It also plans to sell more sponsorships by expanding the number of sponsor categories at many of its schools. It expects the company to continue to add events and acquire upcoming media rights, according to the report.
The biggest opportunity for synergy that WME sees is on the content creation and distribution front. It specifically notes in the report that IMG owns Mercedes-Benz Fashion Week and has access to hundreds of models while WME packages the shows “Project Runway” and “America’s Next Top Model.” It doesn’t outline what it would do with those ventures but says there’s an opportunity to “further develop … and monetize content.”
WME believes over-the-top buyers will drive up the value of content in the future as new digital players like Netflix and Amazon continue to acquire content. The report indicates the combined companies will have an advantage because both have a history of developing or producing content.
The documents say that WME plans to retain key IMG division heads “to ensure business continuity,” but it doesn’t mention the names of any key IMG executives. It says that Emanuel and Whitesell will lead the combined entity as co-CEOs.
IMG Sports President George Pyne and IMG College President Ben Sutton have not stated their future intentions. Neither Pyne nor Sutton returned calls seeking comment before deadline.
WME declined to comment.
Time frame Cost savings Areas of reduction 0-6 months $14 million Aircraft, corporate (excluding IT, human resources, finance), consulting 6-9 months $55 million Organizational realignment, events, clients, production 9-12 months $53 million Indirect spend, finance, human resources, college contracts 12-18 months $29 million Media contracts, IT, footprint, sales force
* In millions
Source: IMG sale documents, as acquired by SportsBusiness Journal
IMG Media has been one of the strongest business units at the company for years, generating $448 million in revenue last year, or nearly 30 percent of IMG’s overall revenue. The financial documents that WME shared with banks show how IMG Media functions, detailing how the business is structured and how it generates money.
IMG Media has two divisions that contribute to its bottom line:
n Rights, acquisitions and distributions, which generated $273 million in revenue in 2013.
n Sports production, which generated $160 million in revenue last year.
The rights, acquisitions and distributions side brokers rights deals as a sales agent or as the rights holder (if IMG already has acquired the rights). It earns 45 percent of its revenue from commissions, typically taking a 10 percent commission on the sale of a property’s rights. Another 40 percent of its revenue comes from guaranteed commitments that IMG makes to a property on what its rights should fetch.
IMG and the property then share in the profit beyond that. For example, it could offer a $60 million guarantee to the NFL for rights in a market like India and get a 25/75 split of any profits beyond that.
The remainder of revenue (10 percent) comes from fixed-fee arrangements, where a property pays IMG a fee to sell its rights, and owned rights (5 percent) that IMG acquired from a rights holder to sell.
Most of the remaining $448 million in revenue from IMG Media comes from its sports production group, which does radio, TV and digital programming for clients ranging from the Indian Premier League to World Snooker. It produces more than 52,000 hours of programming a year, and the business is so established that IMG last year spent $53 million on a new production facility in London.
The sports production unit receives 75 percent of its revenue from a “cost-plus model” that sees a property pay the production costs plus a fee of up to 15 percent to IMG. Another 20 percent of the unit’s revenue comes from a fixed-fee model that pays a one-time fee to IMG for production.
The remaining 5 percent of revenue comes from IMG-owned events that it produces and sells.
An expired apparel and sneaker deal for a Bulgarian tennis player who has never passed the quarterfinals of a Grand Slam event doesn’t on its face suggest much in the way of controversy.
But Adidas and Nike are duking it out over which firm has won the right to dress Grigor Dimitrov on court — and the answer should swing the agent commission on the deal to either his old, mainline agency or to his new, upstart representation.
Bulgarian Grigor Dimitrov is ranked 15th in the world.
Photo by:GETTY IMAGES
Dimitrov, nicknamed “Baby Fed” for the hype touting him as the next Federer — and who perhaps is even better known publicly as Maria Sharapova’s boyfriend — had a deal with Nike that sources said gave the brand the right to match any new contract offer. And that’s what happened in recent weeks, except Dimitrov’s camp is disputing whether the match is really a match from a deal proposed by Adidas, sources said.
Adidas declined to comment. Nike did not respond to requests for comment.
Adidas and Nike are even on money, the sources said: a bit more than $1 million guaranteed annually. Adidas, the sources said, is offering Dimitrov an apparel line in his name and touting that he can sell patch space on his shirt, something Nike contracts prohibit (though it did make an exception for Li Na).
Some top players can bring in hundreds of thousands of dollars from patches, though the market might be limited for Dimitrov unless he breaks through in a big way on the court.
“The value of Dimitrov’s patches are pretty much insignificant,” said Fernando Soler, head of tennis at IMG, which previously employed Dimitrov’s current agent, Tony Godsick. “He comes from a country that is not very strong sponsorship-wise.”
It’s also unclear how valuable a personal apparel line for a player like Dimitrov is, unless he were to win several Grand Slams. He is ranked 15th in the ATP World Tour rankings, and his quarterfinal appearance at this year’s Australian Open was his first time past the third round of a Grand Slam since turning pro in 2008.
Godsick split from IMG two years ago, taking his star client, Federer, with him. Last year, Godsick launched the agency Team8 and has signed as clients Juan Martin Del Potro and Dimitrov.
Godsick could not be reached for comment.
Customarily with apparel contracts in tennis, if a player renews with the company within five years of signing the original contract, the new commission stays with the agent who scored the initial deal. In this case, that would be Octagon, which three years ago negotiated the Nike contract for Dimitrov. If Dimitrov were to sign with Adidas, the commission would flow to Team8.
An Octagon representative did not return an inquiry seeking comment.
BP’s Castrol motor oil brand has renewed its NFL corporate sponsorship and also its agreement with Minnesota Vikings running back Adrian Peterson, the brand’s top NFL endorser. Castrol, an NFL sponsor since 2011, renewed for an additional three years.
Peterson remains Castrol’s top NFL endorser.
Castrol last season used Peterson, the NFL’s Most Valuable Player in 2012, to push its Edge synthetic motor oil and support its “Driven Stronger” platform, in which outstanding player performances were highlighted online. Castrol had previously used Washington quarterback Robert Griffin III as a spokesman.
“Leveraging A.P. and being able to use him to tell our story really helped expand the scope of our sponsorship,” said Carolyn Eckert, director of integrated marketing at Castrol. She said the NFL rights provided product distinction in both the business-to-business and business-to-consumer markets.
“Being able to differentiate is a huge competitive advantage and the NFL gave us an opportunity to create some differentiation within the motor oil category, which is not easy,” Eckert said, adding that both sales and awareness of the sponsorship among NFL fans have risen during the past three years.
Activation has included an NFL football premium mail-in offer, an online trivia contest offering trips to the NFL combine, sponsorship of “The Perfect Challenge” online fantasy game and a recent “Super Bowl Ticket Blitz,” in which Castrol awarded 10 pairs of Super Bowl tickets through a social media scavenger hunt.
Moving forward, Eckert said, the program will focus more on proprietary content, along with increased digital and mobile activation.
Octagon is Castrol’s sports marketing agency.
In the United States, Brian Cull, NHL group vice president of integrated marketing, said new hockey-themed TV ads are expected from Enterprise Rent-A-Car, which is using St. Louis Blues winger and U.S. Olympic hero T.J. Oshie in a spot. Enterprise also will continue its Hat Trick Challenge digital fantasy game through the playoffs, with Barry Melrose serving as the spokesman.
Verizon is expected to have new creative with Alex Ovechkin, although his Washington Capitals will miss the playoffs for the first time in seven years. Bombardier has a new spot in which NHL legend Mark Messier recounts the story of his famous 1994 playoff guarantee, while touting the company’s Can-Am Spyder recreational vehicle. Can-Am also sponsors a bracket-challenge promotion. And Discover Card will continue its “Day With The Cup’’ promotion and will support that effort with new creative.
MillerCoors will stage a digital Coors Light Super Cold Fan of the Week promotion.
In addition to the Tim Hortons treat (left), fans can find Stanley Cup-embossed Oreos.
As for TV ad sales, a year ago, the NHL was only months removed from a lockout that had shortened its regular season from 82 to 48 games per team. This year, ad sales are “light years ahead,” according to Seth Winter, executive vice president, sales and marketing, for NBC Sports Group. Winter said between 85 percent and 90 percent of NBC’s NHL playoff inventory has been sold.
This will be the third consecutive year all NHL postseason games will be televised, airing in the United States across NBC, NBCSN, CNBC and NHL Network.
“The second-quarter scatter market looks strong, and the auto category is exceptionally healthy,” Winter said.
Auto brands advertising in the playoffs include NHL rights holder Honda along with Lexus, Mercedes, Chrysler and Ford.
The NHL corporate sponsors with top positions in the postseason are MillerCoors, Geico, Honda, Pepsi, McDonald’s, Discover, Verizon and Enterprise.
Backing that message in a new TV ad stating that Oberto’s jerky is “What your stomach really wants” is a beefy collection of sports talent. The spot includes Seattle Seahawks cornerback Richard Sherman; U.S. men’s national team captain and Seattle Sounders star Clint Dempsey; snowboarder Louie Vito; and ESPN’s Stephen A. Smith, who provides the voice and personality of the athletes’ stomachs, which are clamoring for some Oberto’s jerky. The shoot was done recently in Los Angeles, and we are told it should be ready in time to air during the NBA playoffs, which begin Saturday.
> LESS IS MORE: As consumers shun the traditional advertising that supports conventional media, every brand is turning to content creation to retain viewer attention span. An interesting test of this approach will be the handful of New York Mets games being sold on the team’s
Clint Dempsey, Brian Urlacher, and Louie Vito are all on board with Oberto’s jerky.
Yes that’s a mouthful, so SNY marketers are working on a sexier name. What it means is that in three or four broadcasts, SNY’s network commercial breaks will be replaced by sponsored content, mostly live and created by SNY in cooperation with some of the team’s and RSN’s largest corporate sponsors. The local commercial breaks will remain in place for the affiliates.
Citi and Verizon have signed on already, but the first “limited commercial” game won’t be until May, at the earliest.
During spring training, Comcast SportsNet Chicago broadcast two contests, a Cubs game and a White Sox game, without commercials, substituting features that included miked-up coaches and White Sox catcher Josh Phegley providing a behind-the-plate view by wearing a GoPro camera.
SNY President Steve Raab said the content being developed for his RSN will include live interviews and behind-the-scenes features. Just how overt the branding will be within these segments is also to be determined.
It’s an intriguing test, but not necessarily an easy sales proposition. Despite all the buzz surrounding content development by brands, we’ve always observed that marketers duplicate more than they originate.
“This is a place advertisers say they want to be, but many have a hard time pulling the trigger,” Raab acknowledged. “So much of advertising is numbers-driven, so it takes a leap of faith and a degree of comfort and trust to take a new approach. So you’ve seen us with early commitments from partners who know and trust us.”
SNY Chief Revenue Officer Brian Erdlen noted that among those advertisers picking up more traditional offerings is first-timer Coldwell Banker and 3M.
Also, Unilever’s Good Humor brand is the new official ice cream for the Mets, with an integrated package that includes SNY ads, title rights to the Citi Field Fan Fest area, signage and “scooping rights” at Citi Field concessions. Other new national advertisers on Mets SNY broadcasts include Ace Hardware, Cooper Tire, and Nestlé for its San Pellegrino and Nestea brands.
The Guinness International Champions Cup has signed MasterCard, Pepsi and Chevrolet.
Among the eight participating teams are Manchester United, Liverpool, Real Madrid and AS Roma, as the tournament expands from six U.S. market last year to 12 this year, including the Big House at the University of Michigan and both Yankee Stadium and Citi Field in New York.
Domestic television is via Fox Sports and FS1. International distribution will see the tourney televised in more than 150 countries.
> CARDED: Consensus NBA lottery pick Dante Exum has signed an exclusive trading card deal with Panini, the NBA’s sole trading card licensee. The 18-year-old Exum, a member of the Australian national team, will be featured on packaging, participate in social media and marketing initiatives, and sign memorabilia for Panini Authentic.
Exum’s first NBA trading cards and autographed cards will arrive at retail in October with the release of ’14-15 NBA Hoops Basketball.
Exum is represented by Rob Pelinka at Landmark Sports.
> COMINGS & GOINGS: At Madison Square Garden, former SportsBusiness Journal, NASCAR and Nets/Barclays Center marketer Amos Varon has been promoted from senior director of sales of sports and entertainment partnerships to vice president, sports and entertainment. He will be selling sports at the arena, along with bookings, productions and events at the renovated Forum in Los Angeles, The Chicago Theatre, and the Beacon Theatre and Radio City Music Hall in New York City.
Terry Lefton can be reached at firstname.lastname@example.org.