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The Long Read | Potential investors will do well to look closely at the football deals of Endeavor and Wanda Sports

(Theo Wargo/Getty Images)

  • Endeavor (IMG) and Wanda Sports (Infront) both looking to raise $500m from IPO
  • Infront’s margins depend heavily on four football deals with uncertain futures
  • Endeavor admits IMG is losing money on three football rights contracts

The imminent initial public offerings on the New York Stock Exchange and Nasdaq of the world’s two biggest sports marketing companies – Endeavor Group Holdings and Wanda Sports Group – should improve the liquidity available to both. Endeavor’s listing could shake up the way the talent representation industry is structured long term. But the development won’t be a game-changer for sport.

The industry’s major underlying trends will not bend to a new trajectory. The competitive dynamics of the sports marketing sector will receive, at most, a minor jolt.

Nor is going public anything new in the sports marketing world. Lagardère Sports and Entertainment has been part of its publicly-traded parent company, the French conglomerate Lagardère, since it was put together by the merger of the Sportfive, IEC in Sports and World Sport Group agencies over a decade ago.

It is a good moment to go to the capital markets with media, entertainment and technology stocks. Venture capital and private equity companies are cash rich and opportunity poor. And while anyone drilling deeply into the numbers – especially the levels of debt and future spending commitments – may have some concerns, it would be a surprise if both did not hit their short-term targets.

Last week the office messaging service Slack went public in New York with shares trading at a 50-per-cent premium to the guide price of $26 (€22.8) per share, valuing the company at more than $24bn. Endeavor is reported to be looking for a valuation of over $9bn.

The markets like to understand exactly what they are buying into and where it lies in the nexus of media and technology. One of the things the $30bn listing last April of music streaming service Spotify showed was that the markets like platforms.

Not for nothing does the Endeavor prospectus continually refer to its disparate group of assets – IMG, UFC, Miss Universe, Professional Bull Riders, NeuLion, tennis’s Miami Open and so on – as a “platform”. A platform that delivers “access” to talent, be that the current heroes of UFC or movies stars like Dwayne ‘The Rock’ Johnson.

Wanda Sports, a small part of China’s massive Dalian Wanda conglomerate, comprises the Infront agency, the Ironman long-distance triathlon franchise and Wanda Sports China, which majors in mass participation events. Wanda’s elevator pitch is less Hollywood than Endeavor’s, but the company too gets the P-word in early. “We are a global sports events, media and marketing platform,” its prospectus says on page one.

Limited impact

The impact on the sports marketing industry, even of a better-than-expected outcome for both, will be limited. It won’t change the rankings, which have Endeavor at number one and Wanda Sports at number two. The two giants have managed to co-exist without ever posing a direct threat to each other and there is no reason why that should change.

There may be areas where IMG and Infront bump up against each other in future – both have been eyeing a major strategic move into rugby; IMG may tilt again at the winter sports empire controlled by Infront – but for the most part, they have developed business areas which don’t conflict.

Nor is the injection of liquidity likely to propel the two players into a different stratosphere to their competitors. In theory, an additional $500m ought to make them more fearsome adversaries in the market for valuable rights or assets. But this depends on the proportion of funds earmarked for growth and the amount which will pay down debt. Neither company is providing a breakdown on that but the suspicion in the industry is that dealing with debt is the priority.

From brokerage to ownership

Endeavor and Wanda are highly-diversified businesses, textbook cases of how sports marketing companies are pivoting from rights trading and representation to ownership of intellectual property – controlling assets which drive revenues long term, rather than gambling on high-risk rights owned by others. And where sports properties can’t be acquired outright, joint ventures or long-term partnerships have become the preferred modus operandi.

However, each still has – at its core – a huge, and volatile, sports rights business.

Wanda’s business segments are: Mass Participation, Spectator Sports (which includes media rights), and Production/Digital. Spectator Sports is by some distance the biggest of the three, in terms of both revenues and profits.

 

Endeavor has three divisions: Entertainment and Sports (including rights trading), Representation (of talent) and Endeavor X (D2C streaming). Entertainment and Sports dwarfs the other two, with rights trading accounting for over $900m in 2018.

Analysts will focus on the headline numbers. Endeavor reported total revenues of $3.6bn in 2018, Wanda Sports of €1.129bn. Endeavor is carrying $4.619bn of debt, compared to the €1.1bn of Wanda Sports. Endeavor has future spending commitments of $4.133bn, Wanda has spending commitments of €2.5bn.

But deep in these labyrinthine, jargon-filled 200-page documents, can be found references to football rights deals which are worth close analysis.

In the case of IMG, they show no matter how diversified your portfolio, you can’t afford to get too many rights deals wrong at the same time without the whole edifice beginning to creak. In the case of Infront, they show that when a small number of deals contribute a big proportion of your profits, the burning question becomes: what happens if you can’t renew them?

When describing these football deals, the Endeavor and Wanda IPO filing documents are not misleading. They are as rigorous as might be expected from a filing to the US Securities and Exchange Commission. But they do not tell the whole story.

Infront expects

On several occasions in the prospectus Wanda stresses that “no single rights-in or services contract in our current portfolio accounted for more than 10 per cent of our revenue”. But Infront’s revenues and profitability are particularly sensitive to four football deals. These are:

  • A media-rights advisory agreement with top Italian football league, Lega Serie A
  • A deal with Fifa to sell the media rights in Asia to the World Cups of 2018 and 2022
  • A long-running deal for the media and marketing rights deal with the German Football Association (DFB)
  • A long-running a deal to host broadcast Fifa events, including World Cup finals.

Their contribution to revenues is set out in the prospectus: “Deals due to expire in 2021, including Serie A, accounted for €159.5m in 2018, €165.6m in 2017 and €148.1m 2016. Contracts set to expire in 2022, including the Asia World Cup and host broadcasting deals with Fifa, as well as with the DFB for media rights relating to the DFB Cup, accounted for €79.2m in 2018, €68.7m in 2017 and €53.8m in 2016.”

In the Risk Factors section, Wanda dutifully points out that it “may not ultimately be able to secure new long-term relationships or maintain our existing relationships (in the latter case, for example, because of changes in leadership and priorities of the relevant rights owners, or changes in operating models that contemplate moving monetisation efforts in-house, or our own management changes) and, if we are able to renew or extend rights-in contracts, the terms we are able to negotiate may not be as profitable as they were before”.

But later the prospectus paints an upbeat picture. It says: “Reflecting the strength of the relationships that we have established with rights-in partners, rights-out clients and other stakeholders and the scope of capabilities we are able to offer in the evolving sports ecosystem, we currently anticipate that we will continue to derive significant business from many of the counterparties of contracts set to expire beyond the current term of the relevant contract, including with Fifa and Lega Serie A. We expect to continue to work with Fifa on various projects (including host broadcast production as well as media and sponsorship sales) and to leverage our long-term relationship with Lega Serie A beyond the terms of our existing contracts.”

We currently anticipate. We expect. But what do the rights-holders expect and anticipate?

Serie A: Infront’s deal with Serie A is generally considered to be one of the most profitable in the business. The agency has been adviser to the league since 2009. Its current six-year deal covers the period 2015-16 to 2020-21. It put up a guarantee of €5.94bn over the period, split €980m per season in the first three seasons and €1bn per season for the second cycle. Above this amount it shares profits with the league. Income from broadcasters was about €1.2bn in the first cycle and slightly higher in the second. On top of this, it is paid a fee for match production and makes a further margin by acquiring the clubs’ archive rights and selling them on to broadcasters.

Although no decision has been taken at a league assembly to confirm that the contract will not be extended beyond 2021, it is difficult to find anyone of a senior level in Italian football who believes that a further renewal is likely.

The clubs are currently considering an offer from the Mediapro agency to create a league channel in a joint venture with Serie A from 2021, based on a minimum guarantee of €1.2bn per season. Mediapro would stand to earn the first €90m per season in revenue over and above that amount from distributing the channel. It is inconceivable that Infront’s advisory deal will be renewed if the clubs accept Mediapro’s offer.

Wang Jianlin, Chairman of Dalian Wanda Group (Imaginechina/MB Media/Getty Images)

World Cup: In October 2011, Infront acquired the rights in 26 Asian territories to all Fifa events from 2015 to 2022, including the World Cups of 2018 and 2022. Infront paid a minimum guarantee of $600m. The sales for 2018 alone (along with China for 2022) brought in nearly $660m. If the second cycle brings in something similar, the total should exceed $1bn. Infront earns 12-per-cent commission on sales and will take 20 per cent of income above the $600m.

However, Infront has no renewal options, either matching rights clauses or first rights of negotiation beyond 2022. A straight ‘renewal’ is not a realistic possibility and – after recent events that hardly need recounting – Fifa is determined that whatever happens next will be beyond reproach. The governing body may yet choose to take these rights in-house – in line with how it sells in the rest of the world – but if it doesn’t, and chooses to work with an agency again, it will offer them in a transparent tender process. Infront may well continue to sell the rights beyond 2022, but first it would have to win them by outbidding all its rivals.  

DFB: Infront, and its predecessor agencies, like CWL Telesport, have handled perimeter advertising for the German Football Association (DFB) for nearly 40 years. In 2011, the federation made Infront its global media-rights adviser, in a deal which covered media and marketing rights to both German national team games and the domestic cup competition. The large-scale centralisation of the media rights to European national teams by Uefa to create the European Qualifiers and Nations League took a deep swathe of the value out of the deal for Infront but in 2015 the deal for the cup rights was extended.

In May, prior to publishing its IPO prospectus, Infront made a shock announcement. It said a former senior employee may have committed fraud when employed by Infront. The public prosecutor in Thurgau, Switzerland, had notified Infront of a pending criminal investigation into: “fraudulent activities linked to perimeter board advertising provided by Infront for matches governed by the German Football Association (DFB)”.

The alleged scam involved providing sponsors with less advertising time than contractually specified in order to create a surplus of ad board time, generating additional revenue which the agency never saw.

In its IPO prospectus Wanda added: “The former employee has made certain formal allegations involving certain senior Infront employees as to their involvement in the fraudulent activities, which we believe, based on Infront’s ongoing internal investigations, are without merit. The former employee may, in the future, continue to make these, or other, allegations.”

The strength of Infront’s historic relationship with the DFB is not in doubt. But it might now find it is tested in a way it never has been before.

HBS: The highly regarded Infront division Host Broadcast Services has been covering Fifa events since 1999, most recently the 2018 World Cup finals in Russia. Host production generally in football is considered a low-margin business but one which can drive considerable revenues.

Historically, HBS had rolling two-cycle deals with Fifa. These were usually renewed in the October or November after the first of the two World Cups. By that precedent, HBS would have known by now what was happening after the 2022 World Cup in Qatar. But it doesn’t.

Following the change in senior management at the governing body, all commercial matters have fallen under chief commercial officer Philippe Le Floc’h since October 2016. All processes have been reviewed and are being handled differently.

It is understood that a discussion will take place over the next 12 months about what happens on host broadcasting after Qatar. Options include a further one-cycle or two-cycle renewal with HBS or a completely different approach, such as putting the contract out to tender. Wanda may expect the deal to be renewed. But it can have no certainty. And industry observers point out that the departure of the founder and chief executive of HBS, Francis Tellier, who announced he was leaving the company in October 2018, will not help. Tellier is seen as having been vital to the strong relationship with Fifa.

Football deals boost IMG revenues, not profits

As a US company, IMG’s roots were always more in golf and tennis than in football. Both have been highly profitable for the agency for decades. IMG insiders would hint that the agency had largely stayed out of football rights because it was a dirty business. Rivals sneered that they just didn’t have the balls.

Ari Emanuel, chief executive, Endeavor (Ethan Miller/Getty Images)

Whatever the real reason, things began to change about a decade ago. The process accelerated following the takeover of IMG by US talent agency WME in December 2013, driven by WME chief executives Ari Emanuel and Patrick Whitesell. As one insider put it, “Ari and Patrick said to IMG from day one: we’ve got your back. If you think it will make money, we are absolutely behind you. They never questioned IMG’s projections because there was no reason to. IMG had never missed its numbers.”

Since then the agency has bid aggressively for virtually every premium football property on the market and has succeeded in building a blue-chip portfolio: the Premier League, the Bundesliga, Major League Soccer, Chinese Super League, Danish SuperLiga, Dutch Eredivisie, Football Federation Australia, European Qualifiers and Uefa Nations League. This list goes on.

In the period 2016 to 2017, several big football opportunities allowed the agency to flex its muscles. These included the global rights to Serie A, the global rights to the FA Cup and the rights to LaLiga in the Nordics. All were won with aggressive bids and all helped drive revenues.

Serie A: In November 2017, IMG acquired the global rights, outside Italy, to Serie A for the three seasons from 2018-19 to 2020-21. The agency paid just over €380m per season, which includes media rights, club archive rights, betting streaming rights and a commitment to marketing the championship.

In the previous three-year cycle, the MP & Silva agency had paid €185.7m per season. MP & Silva is thought to have brought in about €230m per season for the rights, so there was clearly money to be made on the property. The agency is also thought to have matched the value of IMG’s offer at the last minute in negotiations. Nevertheless, the scale of the IMG bid took the industry’s breath away. Few experts could see where the margins might be.

According to research conducted in October 2018 by SportBusiness Media, IMG is on course to lose tens of millions of euros per season on the deal.

LaLiga: Between late 2017 and early 2018, IMG acquired the rights to LaLiga across the Nordics for three seasons, 2018-19 to 2020-21, paying about €30m per season. This was an increase of €6m per season on the €24m that the MP & Silva agency had paid in the previous cycle. The aggressive nature of the bid was a surprise given that most experts were convinced MP & Silva had lost money on its deal.

It is understood that IMG’s confidence was based on a pre-deal covering both Serie A and LaLiga with one of the region’s major media groups. The operator backed out of the deal at the last minute, leaving IMG with little bargaining power with other broadcasters. It chose to launch the Strive Sport OTT pay platform across the region to carry the two leagues plus Major League Soccer. The agency does not publish subscriber numbers but even if local reports of 50,000 subscribers are wide of the mark, and the true figure is much higher, it is hard to see how the agency can avoid losing a large amount on the deal.

FA Cup: In October 2016, IMG acquired the global rights to the FA Cup, excluding the UK, Western Europe and the Middle East and North Africa. The deal was for six seasons, from 2018-19 to 2023-24. The agency paid $121.7m per season for the rights. The rights to the same territories in the previous six-year cycle had been worth $48m per season.

At the time, rival agency executives saw the fee as a massive gamble that was predicated on three things: growth in the value in China, growth in the US and the need for more blue-chip football properties ahead of the upcoming IPO. The Chinese market proved far more difficult than expected but so did most of Asia. One rights expert familiar with the property said that the agency had been hit by “a perfect storm” of negative factors. He expected the losses on the deal to be in the tens of millions of dollars over the lifetime of the deal.

The prospectus breakdown for the Entertainment and Sports division says: “Revenue for the three months ended March 31, 2019 increased $222.6m, or 49.3 per cent, to $674.1m, compared to the three months ended March 31, 2018. Approximately $190m of the increase is attributable to the sale of media rights. Such increase was primarily related to three major soccer contracts, for which we started recognising revenue in the third quarter of 2018 with the start of the seasons, as well as the new UFC media deal.”

However, there is a sizeable sting in the tail: “Adjusted EBITDA for the three months ended March 31, 2019 decreased $31.2m, or 33.6 per cent, to $61.8m, compared to the three months ended March 31, 2018. The decrease in Adjusted EBITDA was primarily due to costs in the first quarter of 2019 associated with the acquired soccer media rights in excess of revenue, for which the seasons commenced in the second half of 2018.”

It goes on: “The soccer media-rights contracts will continue to adversely impact Adjusted EBITDA for the term of the contracts. However, the year-over-year impact will moderate as the second season begins in the third quarter of 2019. Two of these contracts expire at the end of 2021 [Serie A, LaLiga] and the third expires at the end of 2024 [FA Cup].”

Football is the world’s number one sport. Commercially, it has been borne above the rest by powerful tailwinds for the last three decades. As such it has become a very expensive commodity. Expensive to win, sometimes painfully so. But equally expensive to lose. Caveat emptor.

 

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