CAA sale shouldn’t change business as usual

(Variety.com)

By: Brian Mulligan, CEO, Brooknol Advisors October 26, 2014

Last week one of the most important sports stories of the year occurred and yet it required more than four pages of search before it could be found in a newspaper or online.

At stake was control of the largest sports agency, Creative Artists Agency. The sale of CAA to private equity shop Texas Pacific Group (TPG) was covered in business sections and entertainment publications, but not in the sports media. However, the sports agency business is believed to be the biggest part of the purchased company.

CAA is best known for its premiere entertainment agency business. TPG paid $225 million to increase its stake to a control position from 35 percent to 53 percent. It left existing CAA shareholders Richard Lovett, Bryan Lourd, Kevin Huvane and David O’Connor, among others, at 47 percent.

The reason CAA isn’t recognized as the biggest sports agency is that it puts talent in front. As my former boss, the legendary Lew Wasserman always said to executives, “Stay out of the limelight, it will only fade your suit. Let the stars be the stars.”

This seems consistent with CAA’s style, which was born out of the talent agency business. The deal puts CAA’s enterprise value at about $1.4 billion when debt is included. CAA represents sports stars such as Chris Paul, Tony Parker, Dwayne Wade, J.J. Watt, Drew Brees, Peyton Manning, Jimmy Graham, Richard Sherman, Philip Rivers, Buster Posey, Ryan Howard, Cristiano Ronaldo and . . . You get the picture.

CAA has also diversified profitably into business advisory, marketing and investing. In the sports agency business, CAA is the clear leader. Normally there is a winner and a loser when a deal gets done. Historically, because the assets (talent agents) walk out the door every day, third-party owners usually don’t fair well owning agencies. But this combination might be the rare “one plus one equals three” situation.

How so? First, structuring. Leaving 47 percent with the existing talent agents means that they have real and valuable skin in the game. Second, TPG made sure certain key employees were tied to long-term employment contracts. Third, but most importantly, the companies lived with each other since 2010 when TPG bought 35 percent to make sure there was a congruency of style, as much as there can be given one side comes from the investing world and the other the entertainment world.

TPG proved to be what most management types think about it: user friendly and not the usual cut first and ask questions later. TPG found out what we in the entertainment world already know, that CAA has one of the most professional cultures in not only the entertainment business, but in business overall. The normally reserved co-founder of TPG, Jim Coulter, was effusive in his praise of CAA on the announced controlling purchase.

TPG will also free up debt for more expansion, and TPG is among the best financial structuring firms. CAA will continue to do what it does best; maximize the value of its talent in unique and innovative ways, without compromising the brand of the talent.

What this means for the talent under CAA management is better representation and more opportunities to capitalize on brand. Private equity firms usually look for an exit in three to seven years, with closer to seven being the norm. Recently, there have been a fair amount “people” businesses going public, which is one potential exit for TPG.

Or CAA could be sold to another agency — maybe a foreign one as the world of sports continues to globalize, or a firm that would uniquely value what CAA has built as an ad agency.

But, that’s likely five-to-seven years out. For now, all will do what they do best, play their position, and stay in their lane. I expect this to be the rare win-win sale for at least for the next five-to-seven years.

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Brian Mulligan is currently the CEO of Brooknol Advisors, a Media, Entertainment and Sports Advisory Company. Mr. Mulligan has held CEO, Chairman, COO or CFO position of virtually every media/entertainment vertical for majors over a 30 year career, from Co-Chairman of Universal Pictures, CEO of Universal Television, Chairman of FOX Broadcasting and Cable, EVP/CFO of a Fortune 50 Company, SVP of MCA INC, EVP of Strategic Planning and Corporate Development Universal, Senior Executive Advisor Boston Consulting, Vice Chairman of Media/Telecom of a Money Center Bank, and worked extensively in/with private equity. Instrumental in over $175 billion of media and entertainment transactions.