William Morris Endeavor started out as two separate agencies until they merged in 2009. The William Morris Agency was founded in 1898 by William Morris, a Jewish German immigrant to America. After five years of successfully starting a business It was then run by his son and staffers after Morris Sr. stepped down and the company continued its ascent. By the 1950’s WMA was a large agency, by the 60s it was a powerhouse and by the 70s they had branched out into everything from movies to TV to country music and beyond. Endeavor Talent Agency on the other hand was formed in 1995 by Ariel Emanuel, brother of current Chicago May Rahm Emanuel, and various other high-value agents, some coming from rival Creative Arts Agency(CAA). The merger of William Morris and Endeavor in 2009 was the idea of Endeavor executives. Through the misfortune of the main William Morris partners, Emanuel and Patrick Whitesell, originally from CAA, quickly gained control of William Morris Endeavor and each became co-CEO. They were subsequently able to implement their plan for the future which was to turn towards content and distribution to reinforce agency revenue.
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WME|IMG has already cut cost greatly during their short ownership of the UFC by reducing staff by ~15%, eliminating at least four VP level positions and many other managerial positions, eliminating or severely downsizing overseas offices, reducing the number of events each year as well as slashing the production budgets for live events. TUF is expenditure is decreasing from $27 million to $10 million. They have introduced a beauty contest show for ring girls that will be extremely cheap to produce.
This is on top of a company that had over $600 million in revenue in 2015, with an EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization) of $180 million and a free cash flow of $100 million. EBITDA is similar to profit in that it covers operational expenses such as running events and payrolls but does not include cash spent on servicing debt, interest, taxes or other “accounting” items.
source As of 2015, the UFC $475 million in term loans and revolving loan of $60 million with approximate annual debt service of $20 million dollars. Much of the $475 million loan went to distributions to the Fertitta’s and Dana White as the company generated plenty of cash flow to cover operations.
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In fact in 2010, the Fertitta brothers sold 10% of Zuffa LLC to Flash LLC for an unknown amount. Many have guessed $100 million as it gave the UFC a billion dollar valuation that was common in the year 2010. A billion dollar company would also sound attractive to the Emirati Prince who purchased the shares. In October 2009, the Fertittas also took out a $100 million incremental term loan to pay the revolver and issue a dividend. The revolving loan was only $25 million which means $75 million was distributed to Zuffa LLC shareholders as a dividend. Coincidentally, in 2010 they finished bankruptcy of Station Casino’s and were able to up the family stake from 25% to 45% by investing $200 million in cash.
Source This may be the reason WME is keeping Zuffa LLC a separate entity and not clearing its debt like WME did for IMG as the dividends were used from Fertitta’s personal gains as opposed to investments in the companies or dividends for the current owners.
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That was the financial shape of the UFC when WME|IMG decided to purchase the UFC. However, a lot had to happen for a talent agency and talent management company such as WME|IMG to be able to spend $4 billion for less than 90% of the UFC. It all began in 2012, when Silver Lake Partners, a $20 billion plus private equity firm, invested approximately $200-$250(depending on the source) million dollars for 31% of WME.
source. At the time, a Silver Lake Partner spokesperson stated
""WME's clients produce some of the highest quality and most valued content available across both traditional and new media. We believe that WME is a strategic platform for investments and partnerships, positioned at the epicenter of the converging technology and content industries."
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This investment valued WME at around $800 million because on the amount of equity received and other small financial variances. This means SIlver Lake Partners invested in WME to use it as a vehicle to invest in further entertainment and media products. A purchase such as IMG or UFC would probably be unable to occur under the investment parameters of any of their existing funds and partnerships, which has involved companies such as Skype, Dell, NXP Semiconductors, EMC and Avaya.
Then in 2014, WME paid $2.4 billion for IMG. This was $400 million more than the next highest bid and 12 times the 2013 projected EBITDA of $192 million for IMG. Investment banks placed the highest valuation at $1.8 billion.
Source WME paid for this by selling an additional 20% for $450 million to Silver Lake Partners and covering the other $1.95 billion using debt, giving WME a valuation of ~$2.5 billion based on Silver Lakes equity purchase at the time. For 2013 WME’s EBITDA is expected to be around $92 million. The combined WME|IMG is projecting around $100 million in cost saving synergies and EBITDA of the combined company to reach $350 million by 2016. Also before WME acquired IMG, WME had ~$120 million debt meanwhile IMG had $600 million in debt. The IMG debt was wiped out during the purchase leaving WME|IMG with a debt load of around $2 billion dollars.
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These transactions also made Silver Lake Partners the controlling entity of WME|IMG by increasing their equity share to 51%. Now that WME controlled IMG, Silver Lake essentially controlled both companies and put great faith in WME’s Ari Emanuel to harvest synergies and cost saving measures to allow the company to survive. Many people expected WME to go public after the IMG purchase to help finance the $1.95 billion in debt, yet that has not happened.
The combined WME|IMG started off 2015 with a serious intent to expand its reach by completing 12 acquisitions and four strategic partnerships prior the acquisition of the UFC in 2016. They have purchased Professional Bull Riding for $100 million and began allowing a Counter Strike:Global Ops team to train at IMG Sports Academy, an elite sports training center. WME|IMG also purchased Global eSports Management, a talent agency for e-sports like League of Legends and Counter-Strike.
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E-sports are expanding exponentially in Korea and other East Asian countries. In addition to this e-sports talent agency, they have also acquired an e-sports league that will air on TBS called ELeague. Additionally they acquired Fusion Marketing, fully acquired IMG Live and partnered with AGT International. From e-sports to the three previously mentioned companies, all acquisitions involve the distribution of live entertainment and sporting events. Live events are important in a world with DVR because while you can record your favorite TV, it is much harder to avoid seeing the score to a game.
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Before the UFC announcement, on March 23 Japanese company Softbank revealed it has invested $250 million dollars in WME at a valuation of $5.5 billion dollars.
Source Even before the UFC purchase, they had purchased over 12 entertainment or logistical operations that could create live content. On April 20th of the same year, Fidelity announced that it had invested $55 million dollars into private company WME-IMG LLC.
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But biggest of all in 2016, they purchased less than 90% of the UFC for $4 billion dollars. Each Fertitta brother owned 40.5% of the company and are still said to be minority owners so my instinct tells me they each own 0.5% of Zuffa LLC now. Flash Entertainment is said to have maintained its 10% shares and Dana has stated his did not sell all his shares.
For WME|IMG to buy the UFC they needed to borrow and sell even more equity to raise the money. Fortunately or unfortunately for WME|IMG, unlike in the IMG deal where money raised was used to lower the debt loads, the UFC will remain a separate entity with its own credit rating, possibly for reasons discussed earlier, although the Fertitta brothers denied that is what occurred. Also remember even though IMG’s $600 million in debt was eliminated, WME took on $2 billion in debt to acquire IMG. WME|IMG have an EBITDA of $350 million in 2016 if synergies and cost cutting were implemented effectively. And now WME is taking on more debt to buy another multi-billion dollar company.
"Debt for the acquisition, which was announced this morning, has been underwritten by Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, and KKR Capital Markets. WME IMG will also serve as UFC’s operating partner. Silver Lake Partners and KKR will join WME IMG as new strategic investors, along with MSD Capital, L.P. and MSD Partners, L.P., which will provide preferred equity financing, sources said." -Forbes
Around $1.8 billion dollars in debt was taken on by WME to acquire the UFC. The Federal Reserve contacted Goldman Sachs because it was worried that Zuffa, LLC’s debt load was more than six times what the Federal Reserve estimates 2015 EBITDA at $142 million. Additionally, some equity financing was also provided by WME|IMG wealthy client base who received small fractions of ownership for ponying up cash to help the acquisition go through.
“Last week UFC added some celebrity glitter to its ownership ranks. It said that its backers now include Ben Affleck, Sylvester Stallone, Jimmy Kimmel, Tyler Perry, Mark Wahlberg, Michael Bay, Conan O’Brien, Trey Parker, Adam Levine, Guy Fieri, LL Cool J, Abel “The Weeknd” Tesfaye, Anthony Kiedis and Flea of Red Hot Chili Peppers, Calvin Harris, Cam Newton, Li Na, Maria Sharapova, Rob Dyrdek, Serena and Venus Williams, Tom Brady and Robert Kraft.”
As A-list celebrities are quite wealthy is is common for them to also have investment accounts with places like Credit Suisse and Goldman Sachs etc. This means they will be pitched tons of unique ideas like any other ultra high net worth individual and it is likely that celebrities were not the only rich clients targeted and the entertainment nature of the investment enticed celebrities as well. These small investors probably sign away their voting rights or are giving shares that have been stripped of voting rights.
All of this debt taken on to acquire a larger or equal sized often leads to a private company becoming a public company(traded on NASDAQ,etc) by doing an Initial Public Offering(IPO). In doing this they sell shares to the public in return for capital(money). During an IPO a company must say what they are going to do with the funds raised. In this case the first use will to be to reduce the debt load from debt underwritten by by Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, and KKR Capital Markets
WME has two choices for IPOing if it wishes to go public to reduce its debt loads. It can IPO itself WME and Silver Lake Partners can own WME as a public company rather than as a private company. But remember, WME is keeping Zuffa LLC as an independent subsidiary and is not absorbing into its core entity. Silver Lake has also expressed intent to use WME as an investment vehicle for entertainment related technology.
With this arrangement WME can have Zuffa LLC IPO as they own/control ~85% of the shares. In addition to the UFC, they can add their Counter-Strike:GO, other E-Sports leagues and content delivery systems to Zuffa LLC while leaving businesses such as the e-sport agency that were acquired in the core WME entity. At the prices paid Zuffa, LLC is worth $4.6 billion with the addition of e-sports leagues and other businesses and partnerships WME not being counted yet. They can use the proceeds from the shares Zuffa LLC issues during the IPO to pay down Zuffa LLC’s debt. WME can also unload some of their ownership by transforming Class A shares into Class B and selling their Zuffa LLC shares both during the IPO and on the open market afterword. This would give WME access to the liquidity of public equity markets without Silver Lake Partners have to expose WME itself to public scrutiny.
So in effect WME will IPO the Zuffa LLC as its own entertainment and e-sports company with WME staying private under control of Silver Lake. WME will remain in control of UFC by using a multiple share class system. Companies like Google and Facebook use this to keep founders in control. Class A shares have 10x the voting power of Class B Shares while Class C shares often have no voting rights at all. The size of the IPO will depend on the timing, market conditions and the situations of Silver Lake, WME, the UFC, e-sports and lots of other condisertaions. An IPO in the billions would not be unlikely in my opinion.
So to pay back all those loans that WME and Zuffa LLC have taken on as well as give investors a profitable exit, either WME as a whole or the Zuffa LLC as a subsidiary must go public at some point. WME has had IPO talk about it for many years now and has never taken the next step. Now it has acquired a whale of an entertainment company in the UFC along with quickly growing e-sports leagues and other entertainment properties and it is of my opinion these will be the portion of WME that are most likely to go public and save WME from its debt issues.
