How CAA will benefit from TPG deal

Bryan Lourd, left, Richard Lovett, Kevin Huvane and David "Doc" O'Connor

Insider insists no conflicts of interest after 35% stake sale

CAA, through its deal to sell a 35% non-controlling minority stake to TPG Capital, has secured the means to remain a competitor among the top tier of Hollywood talent agencies at a time of great economic and industry challenges.

Reports that the money from the deal, announced Friday, will be used to expand into sports, TV, movies and entertainment production drew questions about how the powerhouse will remain a seller of talent without becoming a buyer of the same talent. There's also the matter of a separate $500 million fund for acquisitions, which is being created jointly by TPG and CAA. It's a fine line.

That isn't going to be a problem, a source close to the agency insisted. He said reports of conflicts of interest simply don't reflect the reality of the deal. CAA, the insider said, will not use the money to produce to a degree that could create conflicts with its all-star client base. He also said the $500 million fund will not be used for movie or television production or to invest in companies that employ clients in areas that could lead to conflicts.

What the investment will do is provide a way for the partners to value and monetize their stake, provide CAA employees a bonus payment at every level and most importantly place the agency on a stronger financial footing at a time its clients' traditional businesses -- movie, TV and music production and distribution -- are under pressure and in some cases declining owing to factors including the global economic downturn, dilution of the marketplace with the growth of new media and falling DVD sales.

CAA also has faced increased competition since the merger of WMA and Endeavor; WME Entertainment has expanded its worldwide marketing business and created a separately run global media fund that is raising $500 million to invest. (CAA isn't the first talent agency to seek an investor: Rizvi Traverse has held a majority stake in ICM since 2005).

TPG's cash infusion also will allow CAA to expand further into what are seen as growth areas like sports representation, where since 2006 the agency has spent heavily bringing in agents and acquiring existing sports-agency businesses. For instance, using internal funds, CAA in 2008 partnered with Sports Structured Finance Group and several former Merrill Lynch bankers -- Robert Stanley, Patrick Lampe and David Pagoda, among them -- to create Evolution Media Capital, which has done more than $2 billion in media and sports transactions, according to CAA.

Those deals included representing the buyers of the Texas Rangers baseball club; structuring Sony ATV's $300 million of debt financing for half-ownership in the Beatles music library; establishment of the Illumination animation studio, which had a hit during the summer with "Despicable Me"; raising the debt for Participant Prods.' $245 million film fund; and raising $100 million for a National Geographic film fund.

Part of that $500 million fund will come from what TPG is paying for its stake in CAA, or has helped arrange in debt financing. All of the new fund's acquisition decisions will be made by CAA and TPG jointly and will include international and domestic investments.

TPG, known as Texas Pacific Group when founded in 1992, is based in San Francisco but has offices worldwide. It manages investment funds that specialize in growth industries, provides venture capital and does debt investments. Co-founder David Bonderman and others previously worked with the Bass brothers, who were major investors in Disney during the 1980s when Michael Eisner took power. TPG also made a movie-industry investment in MGM, but that hasn't worked out well.

As an example of the kind of opportunities the new CAA fund might find interesting, the same insider cited an investment this year in Los Angeles jeans maker J Brand by Star Avenue Capital, a recently formed partnership between the agency and New York-based private-equity firm Irving Place Capital. That deal touted CAA's role as one of helping build buzz for the brand and assisting with events which stars might attend.

The new CAA board will be composed of seven directors from the agency and three from TPG. The CAA members are president Richard Lovett, partners Bryan Lourd, Kevin Huvane, Steve Lafferty (TV), Rob Light (music) and David "Doc" O'Connor, and general counsel Michael Rubel. The TPG members are co-founder James Coulter, vp Tom McConnon and principal David Trujillo.

The most senior of the TPG board members is Coulter, who holds a law degree from Stanford and is said to have final say on the fund's investment decisions. Forbes estimated his personal wealth at more than $2.8 billion.

McConnon, who also has an MBA from Stanford, previously worked at Bain Capital and the Boston Consulting Group and began his career as a policy-planning attache for the Estonian Ministry of Foreign Affairs.

Trujillo, a Yale grad who also has an MBA from Stanford, is in his mid-30s. Before joining TPG in 2006, he was at private-equity firm GTCR Golder Rauner and before that was an investment banker at Merrill Lynch.

Although CAA is not revealing how much TPG paid for its stake, the agency reportedly was seeking for at least the past seven months a minority investment of about $250 million. Besides TPG, CAA's leadership reportedly had talks with potential partners including New York investors Kohlberg Kravis Roberts and Ares Management.

The Wall Street Journal reported that TPG invested about $165 million in CAA and arranged for an additional $200 million debt financing from Bank of America.

CAA had heavyweight help in its quest. Their advisers were New York investment banks Lazard Freres and Rothschild, and its outside legal counsel was Wachtell, Lipton, Rosen & Katz. TPG was advised by Credit Suisse and used legal firms Cleary Gottlieb Steen & Hamilton and Loeb & Loeb.

The deal with TPG, which manages about $47 billion in investments, appears to value CAA for at least $700 million. As part of the agreement, Lourd, Huvane, O'Connor and Lovett agreed to new five-year employment contracts so they can't just take the money and run.

It is in sports where CAA has become a major player in only four years. CAA Sports now has more than 100 employees and represents more than 650 athletes, with operations in the U.S., U.K., Portugal, Sweden, Russia, Japan and Israel. CAA's list of sports clients is said to include football players Peyton Manning and Tony Romo, basketball stars Carmelo Anthony and LeBron James, baseball star Derek Jeter and soccer stars David Beckham and Cristiano Ronaldo. It also represents the New York Yankees, the Pacific-10 college sports conference, U.K. soccer giant Chelsea FC and others.

In a media release Friday announcing the deal, CAA's language reflected the rebranding of the agency as more than just about Hollywood stars. It billed CAA as the "world's leading entertainment and sports agency."

The CAA partners said that "through capital investments" they will "build upon our full-service platform, new business leads developed through TPG's extensive worldwide relationships, expert insight on the international marketplace, and a myriad of other ways."