Endeavor Group Holdings Inc., a Los Angeles–based entertainment powerhouse, is planning an initial public offering that will give investors a rare chance to buy shares in a talent agency.
The company was formed by the merger in 2009 of the William Morris Agency with Endeavor Talent Agency, a boutique firm created by current Chief Executive Ari Emanuel. In 2014, William Morris expanded further with the takeover of sports and modeling agency IMG, before going on an acquisition spree that included in 2016 the purchase of the world’s biggest mixed-martial-arts organization, UFC, among other high-profile properties.
In its prospectus, Endeavor claims to have represented more Oscar and Grammy winners than any other talent agency in 2018, as well as more than 60% of the headliners of major music festivals in the U.S., and managed seven of the 10 best-paid models. The company and its agents represent more than 6,000 clients, including major film and TV stars, writers, musicians and athletes.
But Endeavor has grown far beyond its roots and is now a major producer of content for broadcast and cable networks and streaming channels. The company distributes sports programming and sells media rights in over 160 countries for clients that include the International Olympic Committee and the National Football League. It owns or manages more than 700 events around the world, from UFC fights to the Frieze Art show to multiday music festivals.
Endeavor is the agency for brands that spend more than $60 billion in advertising a year, including such household names as Budweiser parent Anheuser-Busch InBev BUD, -1.19% and Visa Inc. V, -0.88% . Its direct-to-consumer business includes digital video, audio, experiences and education.
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To illustrate the extent of its reach, the company’s investor prospectus offers a series of case studies, including the story of Dwayne Johnson, the former wrestler known as The Rock, who has become one of the most highly paid movie stars in the world as well as a producer of TV shows, including HBO’s “Ballers.”
Other case studies focus on intellectual property, in the stories of the company’s work with the NFL and Epic Games’ “Fortnite”; on brand, in the story of sporting apparel and footwear maker Under Armour UA, -1.03% ; and on owned assets, in the form of UFC.
Endeavor makes money from the fees earned by its clients, as well as from media rights sales, subscriptions, license fees, ticket sales, profit participations, pay-per-view programming, consulting fees, data streaming fees and tuition. (The company’s IMG Academy, a boarding school for student-athletes in Bradenton, Fla., began life as a training ground for tennis prodigies under the tutelage of legendary coach Nick Bollettieri. Tuition there today exceeds that of even the most prestigious prep schools.)
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“As the entertainment industry moves toward a closed ecosystem model with less transparency, our clients and businesses need more insight, resources and solutions than ever before,” Emanuel wrote in a letter included in the prospectus. “We believe being a public company will only further accelerate our ability to look around corners and open up new categories and opportunities for those in the Endeavor network.”
Endeavor is planning to list on the New York Stock Exchange under the ticker symbol “EDR.” The prospectus doesn’t specify how many shares it plans to offer or at what price, using the placeholder sum of $100 million, which can be expected to change once it sets terms.
Goldman Sachs, KKR, JPMorgan, Morgan Stanley and Deutsche Bank are underwriters on the deal.
Here are five things to know about Endeavor ahead of its IPO:
It is highly leveraged and profit margins are shrinking
For all the sprawling empire it commands, Endeavor’s financials are not as strong as might be expected.
The company is highly leveraged, with long-term debt of $4.6 billion and total liabilities of $7 billion, according to its prospectus. It has tapped private equity and debt markets as it expanded, and its accounting is complex, with a lot of moving parts.
“It is very complicated and difficult to understand,” said Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO exchange-traded funds, who noted that the financial statements in the IPO documents include many write-offs, discontinued operations, depreciation from owned franchises, mergers and revalued assets.
“The good thing is that they have a lot going on, and the bad thing is that they have a lot going on,” said Smith.
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For 2018, the company had revenue of $3.61 billion, up from about $3.02 billion a year earlier, smaller numbers than might be expected given the reach of the business. Operating expenses of $3.72 billion exceeded that revenue number, and the company’s operating loss came to $107 million, with interest costs alone consuming $277 million.
The company had net income of $231 million for 2018, after racking up annual losses for 2017, 2016, 2015 and 2014, according to the prospectus.
James Gellert, chief executive of RapidRatings, a data and analytics company that assesses the financial health of private and public companies, observed that the 2018 profit was mostly due to one-time items. “We see a lot of items that are trending negatively, and the operating-profit line is still bumping along with a negative number,” he said. “It hasn’t distinguished itself as a company that can generate positive returns on its asset base or equity base.”
A RapidRatings analysis of Endeavor’s financials assigned the company a financial-health rating, or FHR, of 32 out of 100 for 2018, placing it in the company’s high-risk category. By comparison, RapidRating’s analysis of Walt Disney Co. DIS, -0.12% gave that company an FHR of 87 out of 100 for 2018, placing it in the very-low-risk group.
The RapidRatings analysis of Endeavor identified weakness in leverage, liquidity and earnings performance.
“It is a weak company from a long-term perspective, and reasonably weak from a short-term perspective,” he said. “Post-IPO, the FHR will rise because of the cash they will raise, but investors need to think about how its core and financial health are likely to change over time.”
Endeavor’s non-GAAP disclosures offer another look at underlying profitability — which is shrinking over time. The company’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) strips out equity-based compensation costs, legal costs and other charges.
In 2017, the adjusted EBITDA figure was $516 million, up 45% from 2016. For 2018, adjusted EBITDA came to $551 million, just 7% above the year-earlier number. In the first quarter of 2019, adjusted EBITDA fell by 10% to $83.9 million from $93.6 million in the year-earlier period.
It has huge upfront costs that complicate its returns
Endeavor identifies as one risk factor the huge upfront costs it faces in acquiring the rights to content that may not even resonate with consumers. “We invest substantial capital in our content and owned assets, including in the creation of original content, before learning the extent to which it will achieve popularity with consumers,” says the prospectus.
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For example, as of Dec. 31, 2018, the company has committed to spending about $3.7 billion in guaranteed payments for media, events or other representation rights and similar expenses over the next five years.
“A lack of popularity of these, our other content offerings or our owned assets, as well as labor disputes, unavailability of a star performer, equipment shortages, cost overruns, disputes with production teams or adverse weather conditions, could have an adverse effect on our business, financial condition and results of operations,” it says.
Owning and managing events for which Endeavor sells media and sponsorship rights is another risk factor. These include UFC fights, the Miami Open tennis tournament, the Miss Universe competition and Professional Bull Riders events.
“Organizing and operating a live event involves significant financial risk as we bear all or most event costs, including a significant amount of upfront costs,” says the prospectus.
Endeavor and rival talent agencies are locked in a dispute with writers
Endeavor’s filing comes in the midst of a dispute between the major talent agencies, represented by the Association of Talent Agents, and the Writers Guild of America, represented by two unions on the East Coast and the West Coast, over the WGA’s efforts to overhaul the rules that govern their business relationship. The WGA told its 15,000 members to fire their agents after talks on a new code of conduct broke down.
The writers want to break the agreement first put in place in 1976 under which agents would team writers with other clients to work on a given project. The agent would then forgo the 10% commission fee paid by individual clients for a packaging fee paid by the studio. The writers want the agents to stop taking packaging fees and leave the production business, arguing that agents should be working to get them the best possible deal and not enriching themselves at writers’ expense.
The two sides were due to resume talks in late May after a roughly six-week standoff.
Endeavor acknowledged that the fight is a risk factor. “The outcome of the dispute, including the commercial landscape that will exist in the future between writers and agents, could have an adverse effect on our business. As with the WGA dispute, any revocation, non-renewal or termination of our or our clients’ franchises or licenses, including but not limited to the Artists’ Manager Basic Agreement, any change in our client representation business’ ability to generate new future packaging revenues or its ability to affiliate with other Endeavor companies that produce content, or any unexpected change in franchise or licensing requirements (whether applicable to us, our clients or otherwise), could have an adverse effect on our business, financial condition and results of operations.”
Shareholders in Endeavor will have little say in the running of the company
Shareholders can expect to have little say in the running of the business as Endeavor is planning to list with four classes of common stock, Class A, Class B, Class X and Class Y, which come with varying voting rights.
The Class A stock that will be offered in the IPO will carry one vote per share, as will the Class X stock. The Class B shares will have no voting rights.
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The Class Y stock will carry 20 votes per share and be held by CEO Emanuel and Executive Chairman Patrick Whitesell along with private-equity firm Silver Lake Partners and affiliates. That group will retain control of more than a majority of the voting power of the common stock — and their interests may not align with those of other shareholders, concedes the prospectus.
“As a result,” the prospectus continues, “they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets.”
If Endeavor wants to embrace diversity, it’s not there yet
Like many Hollywood players in the era of #MeToo and #TimesUp, Endeavor promises to embrace “diversity, including and equality across our platform — content, clients and employees,” as Emanuel wrote in his letter.
Yet the company has just a single woman named in its prospectus, Kerry Chandler, who is chief human resources officer. The word “women” appears only once in the prospectus, in the description of the AIG Women’s British Open, a tennis event. The word “diversity,” though, appears five times.
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