Inside 5-Hour Energy Founder Manoj Bhargava’s Decision to Sacrifice Sports Illustrated

Manoj Bhargava, the billionaire founder of 5-Hour Energy, has only one piece of furniture in his office: a five-shelf bookcase cluttered with rival energy drink brands, many of which no longer exist, a reminder of the competitors he has bested and a testament to his single-minded pursuit of commercial dominance. A copy of Sports Illustrated would now seem right at home on that shelf. Soon after Bhargava took control of the esteemed brand’s owner, Arena Group, in late 2023, the publisher suffered through multiple rounds of layoffs and a fractious town hall. The dramatics culminated in January when Bhargava reneged on the $3.75 million quarterly licensing fee Sports Illustrated owed to the licensor of the brand, Authentic Brands Group. Authentic Brands has since given those rights to Minute Media, which can license Sports Illustrated—as well as related properties SI Kids, Swim and FanNation—for $15 million per year, for two years minimum, on a 10-year horizon, according to two people familiar with the deal. Minute Media declined to comment. AI, the Election and Cautious Optimism: 12 CROs on Ad Trends Shaping 2024 While Bhargava and his holding company Simplify Investments have fielded much criticism for losing Sports Illustrated—Arena Group’s most prestigious brand—the decision was highly calculated, according to four people familiar with his thinking. "Removing Sports Illustrated doesn’t make the situation worse for The Arena Group," said a spokesperson for the company. "[Bhargava] is very interested in making sure his businesses are profitable." Sports Illustrated was mostly unprofitable Sports Illustrated generated between $70 million and $85 million in revenue in 2023, with most of that coming from the print product, said two of the sources familiar with the company’s finances. Yet, it was roundly understood that its core business has not been profitable for years, sources said. The $15 million annual licensing payment it had to make to Authentic Brands Group was an additional burden. As a result, Sports Illustrated acted as a drag on the commercial health of The Arena Group, which was profitable in 2023, but only on an EBITDA-adjusted basis. “Without [Sports Illustrated], the assets are smaller, so [The Arena Group] business goes from $250 million to $80 million and the staff shrinks from 450 to 150, but it makes $10 million to $20 million next year,” said a person familiar with its finances. Bhargava’s final bid to keep its most prestigious property While Bhargava was prepared to lose Sports Illustrated, he wanted to retain it, according to two people familiar with the situation. The decision to not pay the $3.75 million licensing fee was a gambit that, if it worked, would have allowed Arena Group to reduce one of Sports Illustrated's most significant expenses, bringing it closer to profitability. Instead, Arena Group has shed an unprofitable asset, strengthening the commercial health of its broader portfolio. “The day after Sports Illustrated is off [The Arena Group’s] books, I expect EBITDA margins and after-tax margins to be higher,” said a person familiar with its finances. Without the publisher, Bhargava can still use the remaining properties to market the products of his other businesses—a key rationale for the acquisition—and the divestiture better positions The Arena Group to operate at a profit, all four sources said. Several of the remaining properties—including The Street, Parade and Men’s Journal—also reach audiences that fit the consumer profile of his other products. For instance, Bhargava can use Parade to market his QVC competitor, ShopHQ, and Men’s Journal to push active lifestyle products, according to two people familiar with the strategy. Bhargava could also use the divestiture of Sports Illustrated as an excuse to reduce his original $110 million acquisition offer, which was priced to include the title but has yet to finalize, according to two people familiar with the situation. The tactic would risk provoking shareholder lawsuits, but it could also give Bhargava a bargaining chip in his bid to avoid paying the $45 million penalty The Arena Group owes Authentic Brands Group for terminating their licensing agreement. If Bhargava manages to escape the penalty, losing Sports Illustrated would practically pay for itself.