Scarred TPG swims again with Hollywood sharks

October 4, 2010

TPG’s investment in a $5 billion leveraged takeover of MGM in 2004 turned out to be a turkey. The film studio’s owners are now on the verge of getting wiped out. But that isn’t stopping TPG from testing the shark-filled waters of Hollywood again. The private equity firm is buying a 35 percent stake in Creative Artists Agency, the firm best known for representing stars like George Clooney and Julia Roberts.

At least TPG looks to be wading in to a depressed market. Studios have struggled to rustle up financing for movies, meaning fewer of them get made, actors earn less and, consequently, fees tumble for agents. Digital distribution of TV shows also is causing ructions.

The upheaval has spread across the industry. CAA rivals William Morris and Endeavor cobbled a messy merger last year to cope. That deal predictably prompted some valuable employees to flee. TPG seems to have tried to prevent a similar potential exodus at CAA by locking in senior agents for five years while allowing them to cash out part of their stakes in the firm.

The upshot is that for its non-controlling stake in CAA, TPG is paying about $165 million and arranging for $200 million of debt, giving the agency a valuation of around $700 million, according to news reports. It is also pledging cash for a jointly funded $500 million pot for acquisitions.

CAA needed the new capital to expand. It wisely diversified into the sports business a few years ago and now represents more than 650 athletes, including New York Yankees shortstop Derek Jeter and soccer great Cristiano Ronaldo. In fact, the joint announcement from CAA and TPG didn’t even bother to mention its Hollywood clients. But the sports arm, however promising, is expensive because of upfront payouts.

TPG may be able to help in other areas, too. International expansion and the agency’s fledgling investment banking arm will help further diversify the agency. Still, it’s difficult to see a clear path to a profitable exit for TPG in a sector  where people matter far more than financial engineering. What’s more, no matter how hard TPG may try to distance CAA from the film and TV industries, they remain a cornerstone of the agency’s business. And outsiders who swim with Tinseltown’s sharks all too often get eaten.

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