Pieces in place for IMG sale; who are the likely bidders?
IMG College President Ben Sutton walked out of the opening panel at the IMG World Congress of Sports and made it 10 feet down the hallway of the Ritz-Carlton before an executive at a competing agency grabbed his shoulder.
“What’s going on with the IMG sale?” the executive asked.
|“We’re in year nine” of Forstmann Little’s ownership, said IMG’s George Pyne, leading to his remarks that the company would probably be sold soon.
“Forstmann Little has bought and sold 39 companies,” Pyne said. “They’ve held companies for less than a year, the average is five, the longest is nine. We’re in year nine, so I think it’s reasonable to say sometime in the future, somewhere between four and 24 months, something would happen.”
But sources close to IMG and familiar with the company’s plans expect the sale to be completed on the short end of that. The goal is to begin an auction process in May, secure a handshake agreement by the end of the summer and close a sale by the end of the year. And they expect that sale to be an all-cash offer of more than $2 billion.
“IMG’s been built into an attractive property from both a financial perspective and vanity perspective,” said Steve Horowitz, a partner at the sports investment bank Inner Circle Sports. “The new owner has an opportunity to grow a business based on solid financials in an exciting world, which should encourage a lot of bidders to look at the business.”
The IMG sales process will be run by Forstmann Little, which is led by director Kathleen Broderick, and Akin Gump Strauss Hauer & Feld partners Mark MacDougall and J. Kenneth Menges Jr., who are managing the wind-down of Ted Forstmann’s estate.
The first step will be to hire a bank. In late March, Forstmann Little spent two weeks meeting with interested bankers, and it plans to select a bank by late April. Twenty major banking and investment groups pitched to manage the IMG sale, including Goldman Sachs, Morgan Stanley, JPMorgan Chase and The Raine Group.
Pyne said on his panel that the bank has one priority. “They have to execute,” he said. “They have to close.”
Forstmann Little and Akin Gump want to sell the company in its entirety because it’s the quickest and easiest way to return money to the investors and trustees who own it.
A sale of IMG has been expected ever since Forstmann Little acquired the company for $750 million in 2004. Speculation of a sale increased after the private equity firm’s founder, Ted Forstmann, died in 2011.
There are 15 limited partners that invested in Forstmann Little’s final fund, which bought IMG in 2004, and they had the option to force a sale of IMG after Forstmann’s death. But instead of forcing a sale, they last year extended the expiration of the fund until this June.
The investors could extend the fund again, but that’s unnecessary if the sales process begins, and the trustees at Akin Gump are intent on selling the company and completing their dissolution of Forstmann’s estate. (They already have sold much of his art, property and homes.)
Both the Akin Gump team and Forstmann Little executives believe IMG is well-positioned for a sale. Its earnings before interest, tax, depreciation and amortization (EBITDA) increased from $146 million in 2011 to $175 million last year, and are projected to exceed $200 million this year, according to sources familiar with its earnings.
Much of the recent EBITDA increases have been provided by IMG College. The business, which was largely built through acquisitions between 2007 and 2010, recorded $65 million in EBITDA last year. But sources said the division also has more than $2 billion in financial guarantees for collegiate media rights over the next decade.
In a credit opinion written last summer, Moody’s praised the company’s EBITDA growth and added that its annual revenue totaled $1.38 billion and its operating margins were 11 percent. Moody’s also said that IMG had $197 million in cash and generated good cash flow.
“We’re a market leader in almost every business we’re in,” Pyne said during the panel. “We’ve had three years of double-digit earnings growth, and the company is in good shape.”
Pyne said the executive team at IMG will continue to manage the company. He didn’t say whether they would be involved in the sale.
Mike Dolan, IMG chairman and CEO, has already met with potential buyers to gauge their interest. Industry sources, who declined to speak on the record because of the sensitivity of the sale, said Dolan had met with people from agencies such as CAA, William Morris Endeavor and MP & Silva; private equity firms; and the Qatar Investment Authority, a sovereign wealth fund that explored buying AEG.
Sources said that Dolan didn’t have permission from Forstmann Little to have those conversations and has been told to stop having them.
The agencies Dolan met with and others will have to weigh whether they could absorb all of IMG and afford the company’s $2 billion price tag.
The company’s corporate consulting and event businesses could benefit CAA, and its media business might boost MP & Silva’s bottom line, but it’s unclear if those agencies would want the fashion, college or academy businesses. It’s a complicated purchase that each will need time to consider.
Financial experts said private equity firms are more viable as buyers because they have the capital necessary to stomach the $2 billion cost, but they will have to determine if it’s an investment worth making.
“These companies are sitting on $1 billion, $2 billion or $3 billion that they must spend,” Horowitz said. “Every private equity firm with an interest in sports and entertainment has to look at it. That doesn’t mean they need to buy it, but they must look.”
But most observers expect a wealthy individual to buy the company, someone who is eager to get into sports and sees a value in the business. IMG has forged joint ventures over the years in Brazil and India in order to prime two potential buyers, Eike Batista and Mukesh Ambani, respectively, among the wealthiest men in their countries. Other wealthy individuals, such as former Yahoo Chairman and CEO Terry Semel and business magnate Ron Burkle, have expressed interest (see related story).
“It will be hard to find the right people to buy the whole property,” said Donald Dell, who founded IMG’s former competitor, ProServ. “There are only eight or nine people in the world who can buy it at the price they want.”
Dell thinks that the $2 billion price tag is so high that Forstmann Little will be forced to sell the company in pieces. “I just don’t see how else they can get the price they want,” he said.
Another possibility is that an agency or private equity company buys all of IMG and then sells off various assets of it. But that strategy holds serious tax implications for the buyer that may make that strategy cost prohibitive. If a company paid $2 billion for IMG stock, which is what Forstmann Little will be selling, and sold the IMG Fashion business for $100 million, it would have to pay a 35 percent tax on its $100 million and another 20 percent tax if it paid a dividend to shareholders from the sale.
“The key part about buying it just to sell it is that it’s very expensive,” said Robert Honigman, a tax attorney at Arent Fox. “Any for-profit buyer that buys the stock and sells the assets and liquidates it would have two levels of tax — corporate-level tax on the asset sale and shareholder-level tax on dividends.”
The sale represents an opportunity not just for Forstmann Little but also for a host of high-level, current and former IMG executives. Forstmann Little sold stock in 15 percent of the company at a discount to IMG’s top executives after it bought the company. Those executives could stand to make a significant return on their stock.
It also represents an opportunity for other agencies. Much of IMG’s business is based on relationships with athletes and clients. After Forstmann Little acquired the business in 2004, much of IMG’s top talent left, taking those athletes and client relationships with them, and competing agencies expect the same to happen after this sale.
“When it’s sold, the best talent will leave, and it will create huge opportunities in the agency world,” said Charlie Besser, owner of Intersport, a Chicago-based competitor of IMG.
Pyne said during the panel at the conference that IMG’s management team and employees will continue to focus on “creating good value.” He expects IMG to follow in the tradition of other companies once owned by Forstmann Little such as Gulfstream and Dr Pepper, which continue to succeed in the aerospace and soft drink industries. He expects IMG to continue to be a leader in sports and entertainment.
“People ask me all the time, ‘What’s going to happen?’” Pyne said. “The only thing you can say is that you don’t know what’s going to happen … other than that it will be a very professional and thoughtful process, and IMG should follow in the tradition of those other companies [Forstmann Little sold].”
He added that he’s personally looking forward to the sale because he believes the sale price will prove what a great company the employees at IMG have built.
“There’s been a lot of speculation over the last several years at IMG,” Pyne said. “For me, it has been the equivalent of intellectual waterboarding, and I am looking forward to an objective result because there won’t be any more speculation as to what value has been created. I’m very bullish and confident of what’s going to happen.”