What Impact Will The WGA/ATA Dispute Have On WME's IPO Plans?

Even in a normal year, news that the international entertainment and marketing company William Morris Endeavor Entertainment LLC (WME) is making plans to go public would be receiving a lot of attention in Hollywood. But given that WME owns Hollywood's biggest talent agency makes the move even more high-profile. Add to that the fact that Hollywood's writers (many of whom are repped by Endeavor-IMG) are in the middle of a dispute with WME and the other members of Association of Talent Agents (ATA) over a new Code of Conduct and this is an IPO that will be about as high profile a move as you can in the Hollywood business community.

So what impact does the current dispute between the Writers Guild (WGA) and the ATA have on  WME's potential IPO plans?

First of all, it's important to know that when a company is planning to go public, they prefer to have their financials as favorable as possible before the announcement. The first goal of an IPO is to sell the publicly offered shares at the best possible price. Other than some outliers such as Lyft, companies moving towards an IPO need to show potential investors they are a solid financial bet. Investors want to see steadily growing current revenue streams and the possibility of future growth. So IPOs tend to be issued at a time when the company's finances and future make the shares attractive to investors.

This is especially the case with WME since the Silicon Valley private equity firm Silver Lake has a 51% stake in the company. And while Co-CEOs Ari Emanuel and Patrick Whitesell are members of the WME executive committee, so is Silver Lake Partners Managing Director Egon Durban, who is also WME's Chairman of the Board of Directors.

While Silver Lake hasn't publicly discussed its reasons for investing in WME, private equity firms who invest large amounts of money in late-stage pre-IPO companies are expecting to see a substantial return on their investment when the company goes public.

Which means the resolution of the current stand-off between the WGA & the ATA is likely to have an outsized impact on WME's plans to go public and its ability to price shares at a level that will allow the company's partners and investors to make money.

WME is a diverse company that is much more than just a talent agency. Among other businesses, it also owns the Ultimate Fighting Championship league, Professional Bull Riders and the Miss Universe Organization. But a major part of its revenue stream remains its relationship with its clients, including some of Hollywood's most successful writers.

When most industry outsiders think "agent," they think of someone who represents a writer, producer or actor and for that representation, the agent receives a cut of their client's earnings - most often 10 percent.

But as the agencies have consolidated over the past fifty years, the role of an agency has evolved and grown. In part because you can't run a massive agency solely off those ten percent slices. So agencies such as WME have acquired related businesses and launched their own internal production units. But for the four largest Hollywood talent agencies, a continuing stream of revenue has been the money that comes from packaging deals.

This explanation doesn't cover all of the nuances, but generally speaking, the agency assembles the key parts of a package - a script, showrunner, perhaps a key actor or two - and sell the "package" as a whole to the network. 

As part of the packaging process, the agency forgoes its typical 10 percent commission and instead extracts revenue directly out of the total cost of the packaged deal. They are paid a so-called 3-3-10 packaging fee, which earns the agency 3 percent of the base license fee per episode, 3 percent of the base license fee per episode which is deferred and payable out of net profits and up to ten percent of the show's Modified Adjusted Gross Receipts (MAGR).

That first 3 percent generally yields the agency somewhere between $350,000 and $700,000 a season, depending on the episodes ordered and a number of other factors. The second three percent seldom comes into play, since most shows won't show a net profit unless they are very successful. 

The final piece of revenue is the hardest to calculate from the outside. Generally speaking, a project's MAGR won't be in the positive numbers unless the series has aired multiple seasons and sold into syndication. The major agencies argue that changes in the television industry have meant that the MAGR on a very successful television show that used to earn the agency upwards of $125 million may now only generate $25 million. And the situation is even more complicated for shows sold to streaming platforms since those rights are typically sold up-front in the form of larger up-front fees. It's difficult to parse these claims from the outside, but it is easy to see that just a couple of successful packaging deals can markedly affect the bottom line of any of the big talent agencies, WME included.

The current fight between the WGA and the Association of Talent Agencies (ATA), of which WME is a member - has several components and I won't spend the time here laying those out. What matters in this context are the packaging fees and how those fees impact the outcome of any possible IPO plans by WME.

When any company officially decides to go public, it has to lay out some financial benchmarks for potential investors. And while it's impossible to say from the outside what percentage of the WME revenue is derived from packaging fees, it's likely to be substantial. According to figures released by the WGA, 87 percent of scripted series in the 2016-17 season were packaged and nearly 80 percent of those involved packages were put together either by WME or it largest rival CAA.

The members of the ATA are fighting any alteration in the packaging fee status quo for a number of reasons. But for WME and other large agencies that hope to go public, any decrease in the money they receive from packaging fees has an impact on their IPO plans. Especially any reduction in the MAGR cut, which has the advantage of being revenue that often happens after the show has been completed and the various talent pieces of the package have moved on to the next project.

It would be foolish to predict how this current dispute between the WGA & the ATA will be resolved. But given the financial stakes involved, it's extremely likely that any changes to the current system will be seen by WME and other large talent agencies as an existential threat. They can make money without the current packaging fee system. But they can't make the revenue required to make their IPO plans a slam dunk for investors.

It's impossible to accurately estimate the financial impact a substantial change to packaging fees would have on WME's IPO plans. Part of that calculation involves things that can't be quantified as I write this: the size of the offering, the initial price per share, etc. But based on the sparse financial figures available to the outside world, it's clear that the impact could be in the hundreds of millions of dollars. A long and messy dispute can easily delay any IPO plans or force WME to postpone them completely until the company is seen as a more reliable financial bet for investors.

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