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High Debt and Big Losses: How Will Wall Street React to Endeavor’s Risky IPO Plan?

For years, Ari Emanuel has been engineering WME to expand beyond its talent-agency roots into the big leagues of global entertainment, sports, distribution and marketing.

WME parent Endeavor’s IPO marks the first time in 40 years that a Hollywood talent agency has opened its books to Wall Street, a move that’s fraught with complications. Case in point: ICM became part of publicly traded Marvin Josephson Associates from its formation in 1975 until it was taken private in a $70 million management buyout in 1988. As ICM insiders from that era can attest, it can be difficult to explain the largesse and uniqueness of the agency business to investors scrutinizing a profit-and-loss statement.

Endeavor is asking potential investors to bet on a risky strategic vision that hasn’t come to fruition yet in the form of bottom-line profits.

The financial figures disclosed in the company’s prospectus filed May 23 with the Securities and Exchange Commission show that Endeavor is burdened by heavy debt, steady losses in some units, negative cash flow and big capital needs for start-up efforts such as Endeavor Content and Endeavor Streaming.

After a spree of more than 20 acquisitions since 2012, Endeavor has more than doubled in size and now has 7,000 employees in 20 countries.

There are some questions about the long-term health of the company’s single biggest driver of earnings, the mixed martial arts giant UFC, although it has the benefit of locked-in revenue from a whopping seven-year rights deal with ESPN that began in January and is valued at $300 million a year. And WME, the agency that’s central to Endeavor’s strategy of leveraging its access to top-tier talent, is in the thick of a nasty fight with the Writers Guild of America that threatens a key source of income: TV series packaging fees. The sudden loss of WME’s writer clients in April, amid the industrywide dispute, underscores the volatility of the talent representation business.

“There are no other publicly traded companies like this,” says Matt Kennedy, senior IPO market strategist for Renaissance Capital. Kennedy points to the company’s lack of free cash flow and a high debt-to-earnings ratio as potential red flags for investors.

Endeavor is composed of a disparate set of assets — from Professional Bull Riders to the Miss Universe pageant to the Miami Open tennis tournament to the Frieze art fair franchise — which don’t offer a lot of natural synergies to generate economies of scale. In its IPO pitch, Endeavor emphasizes WME’s role as a wellspring for relationships with stars such as Dwayne Johnson, who can work across the Endeavor “platform” to launch live event businesses, secure endorsement deals and licensing and merchandising pacts, as well as launch a YouTube channel and a production venture, all while WME helps him land top movie and TV roles.

“Amidst both industry shifts and our own evolution, access has remained at Endeavor’s core,” Endeavor states in the prospectus.

The challenge as a business strategy for a public company is that Johnson — and any other talent — can exit WME as a client at any time. This is why Endeavor has put so much focus on buying and building what it calls “owned assets” that can’t walk out the door. The 2014 purchase of IMG for $2.3 billion brought to Endeavor the infrastructure to distribute TV programs around the world. And that spurred the launch of Endeavor Content.

Endeavor’s network has benefited UFC through agency representation of its fighters, expanding their appeal in mainstream entertainment through film and TV roles. Licensing and merchandising has been growing, as is revenue from international TV deals. In March, UFC expanded the deal reached with ESPN last year, adding two years to the term and making Disney’s ESPN Plus streaming platform the exclusive pay-per-view home for UFC in the U.S. UFC’s contractually guaranteed revenue is a huge plus for Endeavor as it will provide steadiness amid the inevitable ebb and flow of sales and expenses in other divisions. But UFC also faces heightened competition from an upstart MMA venture, Professional Fighters League, and WWE, which has also been strengthened by rich new TV rights deals.

Endeavor is positioning itself as a growth company that has been designed to take advantage of the upheaval in the traditional media and entertainment marketplace. Its last private market valuation was about $6 billion. In the IPO, the company is expected to seek a valuation of nearly $10 billion, as private investors look for a substantial return.

Kyle Guske, an analyst at research firm New Constructs, warns investors that the company’s true profits are declining, and that its real investment returns have been lackluster. New Constructs’ research report gives the company a “very unattractive” rating.

“Profits are actually turning down,” says Guske. “They are not generating quality return on investment.”

Skeptics say Endeavor may face the problem of being neither fish nor fowl: It’s not a sexy tech start-up, nor is it a full-blown media company. In Emanuel’s view, Endeavor’s uniqueness is a sign of its nimbleness and vision of how the content marketplace has changed since the original Endeavor agency (which became WME with the 2009 takeover of William Morris Agency) was formed in 1995.

WME Illustration Bull
CREDIT: Brian Stauffer for Variety

“We saw the disruption happening, and we’ve built our company as a platform to enable clients to take advantage of all aspects of the new level of content that is coming,” Emanuel, who is CEO of Endeavor, told Variety in October 2018. (Emanuel declined to be interviewed for this story, citing a quiet period for the company.)

But Endeavor’s patchwork-quilt approach will require discipline on the part of the company to follow through on its talent-leveraging strategy, and education to sell those efforts to prospective shareholders. The prospectus also cautions investors that there are no plans to pay dividends anytime soon. Endeavor states that proceeds from the IPO will be devoted to “working capital and general corporate purposes.” Paying down debt and acquisitions are also cited as possibilities. All of that translates to the biggest pitch of Emanuel’s career.

“They may be able to convince investors that the whole is greater than the sum of its parts,” says Renaissance’s Kennedy.

The IPO process is risky because it forces Endeavor onto a quarterly earnings cycle that comes with a level of scrutiny which can be tough for companies like Endeavor that are still in invest-for-growth mode. But the long-awaited IPO plan is fueled by Endeavor’s demand for capital and what is likely the desire of its primary private equity backer, Silver Lake, to see some return on its investment of more than $1 billion in Endeavor since 2012. After nearly two dozen acquisitions, it’s clear that those returns are not coming from organic operating profits, at least not yet. However, Silver Lake, whose managing partner, Egon Durban, is chairman of Endeavor’s board of directors, is expected to hang on to much of its stake in the company post-IPO, as has been its practice with past investments.

Endeavor also comes to market with a convoluted stock offering that gives insiders including Silver Lake executives, Emanuel and Endeavor executive chairman Patrick Whitesell super-voting shares. That amounts to iron-clad control of the company and its board of directors through a dual-class stock structure that is a turnoff to many investors.

“The IPO of this group of Hollywood superagents demands investor super-tolerance,” wrote Reuters financial columnist Jennifer Saba on May 24.

“There are no other publicly traded companies like this.”
Matt Kennedy, Renaissance Capital

Endeavor maintains that the company has enough growth momentum to justify an IPO. From 2015 to 2018, revenue grew at a 27.1% compounded annual growth rate, according to the filing. Acquisitions, notably UFC, fueled that rise, although Endeavor credits the combination of “industry tailwinds, organic reinvestment and strategic acquisitions.”

The various components of Endeavor’s three operating units — Sports and Entertainment, Talent and Representation and Endeavor X, home of the money-losing streaming services — make it hard to determine how discreet units such as UFC and WME are performing. A number of prominent media and sports equity analysts contacted by Variety say they have no immediate plans to cover the company.

WME has been on a tear in recent months, setting up nine-figure overall deals for then-clients including Greg Berlanti, Dan Fogelman, and Jonathan Nolan and
Lisa Joy. Commissions and packaging fees tied to those deals will flow in for years to come, no matter how long the WGA-agency impasse drags on. At the same time, Endeavor Content, which is also housed in the Talent and Representation unit, is still in start-up mode and probably will be a drag on earnings for some time unless it delivers a massive global hit.

Endeavor is squarely pitching the diversity of its holdings as a strength, not a weakness.

“We believe our financial profile provides flexibility to continue to execute upon our various growth initiatives,” Endeavor states. “Our model is further supported by the diversification of our business, which we believe helps insulate our revenue and earnings streams from operational and market volatility.”

Endeavor’s bold bid to go public comes at a time when the operations of Hollywood’s largest talent agencies have never been more under the microscope. There’s a clear sentiment that more consolidation is inevitable. Rumors about deals involving new configurations for shops such as Paradigm, APA, Gersh, Abrams Artists and others seem to surface every week.

The furor sparked by the Writers Guild battle with talent agencies over packaging fees and affiliated production entities — Endeavor Content is Exhibit A — has also spurred many in the creative community to take a hard look at their agency relationships.

Leon Edwards celebrates an upset win over Gunnar Nelson at UFC Fight Night at O2 Arena in London. Mixed martial arts promoter UFC is Endeavor’s biggest earnings driver.
Scott Garfitt/REX/Shutterstock

The WGA has been hurling criticism at WME, CAA, UTA and ICM Partners as it pushes for reforms in the rules that govern how agents work with guild members. As of April 12, the WGA has mandated that its members fire agents who won’t adhere to the terms of its newly established Agency Code of Conduct. The guild also filed a lawsuit against the four agencies on April 17. The WGA and the Assn. of Talent Agents are in the process of restarting negotiations, but the hostility between the sides has become toxic.

WME’s largest rivals were none too happy when Endeavor unveiled its prospectus just one day after the WGA agreed to resume negotiations with the ATA. The disclosure added grist to the WGA’s claim that the largest agencies have become beholden to outside investors who demand profits that may come at the expense of clients.

WME, through its affiliation with Endeavor, has taken the most ambitious steps to expand. But CAA and UTA have also diversified with content, sports, marketing and branding activities, supported by private equity investment and debt. It’s a high-wire act that will force an accounting of how those efforts are performing in a different way than agencies have been evaluated in the past.

“If talent agencies wish to become full-fledged entertainment production companies, then be careful what you wish for,” warns Gene Del Vecchio, adjunct professor of marketing at USC Marshall School of Business. “The industry is a roller coaster of highs and lows, and the great majority of companies have proven not able to survive the lows.”

Endeavor’s IPO ambitions may also be a catalyst for another disruptive event in a cutthroat business: a big burst of client poaching. Rivals will undoubtedly try to capitalize on the uncertainty of the moment to woo away the stars that Endeavor needs to make its talent-access pitch pay off for investors.

Although Emanuel has long since given up day-to-day agenting duties, WME competitors will seek to exploit the insecurities of boldface names, who may worry about their interests getting lost in the shuffle of the larger Endeavor operation. WME’s fierce team is understood to be bracing for this dynamic and is ready for battle against attacks on the agency’s roster of more than 6,000 clients. The atmosphere is especially unsettled because it is expected that a good portion of the 7,000-plus writers who fired their agents at WME and other shops will be up for grabs when the dust settles on the WGA flap.

“Anyone who thinks we aren’t in a free-for-all right now doesn’t know agents,” says a partner at a WME rival.

(Pictured: Endeavor’s Patrick Whitesell and Ari Emanuel) 

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