As Endeavor marks the first anniversary today of its debut on the New York Stock Exchange, the company deserves credit for doing a lot of things right.
The stock has stayed above its IPO price of $24 for most of the past 12 months. The company has generated enough topline revenue gains amid tough economic conditions to demonstrate that its divisions have room to grow.
But in other ways, the company led by Ari Emanuel looks to become harder to sell in the future if Endeavor wants to stay a public entity. Its high debt, stratospheric CEO compensation package and corporate structure with a handful of controlling shareholders is out of step with the expectations of many institutional shareholders and governance watchdogs.
Indeed, Wall Street’s appetite for unicorns that rack up losses and debt in the hunt for revenue and market share seems to be waning, just as the number of business-debacle TV series rises (think “WeCrashed,” “The Dropout,” “Superpumped”).
The past two weeks have marked a turning point — or maybe a bursting point — for the content bubble that has enveloped entertainment. Netflix’s surprising weakness and the “I-won’t-overspend” manifesto that David Zaslav delivered for the new-model Warner Bros. Discovery are big signs that the growth-at-any-cost moment is over. Global markets are seeing volatility spurred by war in Europe and inflation in the U.S.
Endeavor’s leading light in its four reported quarters to date are its UFC division. The MMA league has delivered the best financial performance in its 28-year history, with licensing revenue up around the world. Disney executives paid UFC the ultimate tribute earlier this year by citing its pay-per-view pact with UFC as a big mover for subscriptions for one of Disney’s top growth initiatives, the streamer ESPN+.
Endeavor’s WME is off the COVID ropes with revenue gains up double-digits from pre-pandemic 2019 levels. WME has been at the heart of megabucks deals of late, such as Guy Fieri’s $80 million contract with Food Network, Peyton Manning’s innovative “Monday Night Football” megacast deal with ESPN and the Kardashian clan’s multi-series deal with Hulu. Moreover, WME has largely held on to its heavyweight partner-level agents despite much speculation of clashes to come after going public and anger over the company’s post-IPO winners and losers.
Shares have closed below the IPO price only three times, all in August 2021. For the 12 months since IPO, the share price is essentially flat, after reaching a high of nearly $35 in January. For the year to date, shares are down about 31%, compared to an S&P 500 decline of about 10%. On Thursday, Endeavor shares closed at $24.03.
Endeavor has faced criticism from the start for aggressive accounting techniques that it says are designed to take the true measure of the company’s operational performance. Skeptics say Endeavor’s focus on adjusted earnings before interest taxes depreciation and amortization is a way of making big losses look better.
To wit, for the full year 2021 Endeavor posted a net loss of $467.4 million but after adjustments for one-time expenses and charges, that loss became adjusted net income of $285 million. The delta there is wide indeed.
For the same year, Emanuel was granted a compensation package worth $308 million on paper — most of that inflated by the value of stock awards that won’t vest for years but have to be accounted for all at once, hence the eye-popping number. Endeavor executive chairman Patrick Whitesell received $123.1 million, also inflated by stock awards. The value of those awards took a big toll on Endeavor’s net income – the real bottom line — but they are eliminated as one-time events from adjusted EBITDA calculations. In reality, Endeavor disclosed that Emanuel’s actual take-home pay for 2021 was about $67 million, while Whitesell’s was $11 million.
Emanuel, Whitesell and a handful of other insiders from Endeavor’s longtime private equity owner Silver Lake own preferred shares that give them control of more than 50% of voting shares. That helps insulate them from tough questions about operational decisions and generous executive compensation at a time when meaningful profit is seemingly a long way off.
Endeavor has explained its complicated EBITDA math as the result of the company coming together over the past decade through a whirlwind series of acquisitions. All of those full- and partial- acquisition agreements and disparate accounting standards had to be cleaned up over the years. That process continued this week with Endeavor unveiling Thursday that it had struck a deal to take full ownership of its Endeavor China venture and its On Location, a sports-focused hospitality partner to the NFL and other leagues.
After a failed IPO attempt in 2019, Endeavor proved the doubters wrong by successfully mounting a public offering that raised $511 million. Industry chatter that the mercurial Emanuel was not cut out to be the CEO of public company has quieted. After four largely uneventful earnings reports and conference calls with top Wall Street analysts, Emanuel has shown he understands boardroom etiquette.
Endeavor told investors straight up last year that its shares would not pay dividends “in the foreseeable future” as it pursued growth opportunities in sports, events and content. That narrative found receptive ears at a time when the sky seemed to be the limit for content spending and subscriber growth for top streamers.
But that storyline is changing for the industry at large. How fast the winds shift may well depend on the update that Disney delivers for Disney+ and Hulu on May 12.
One way or another, in a bearish environment, it’s only a matter of time before Endeavor will have to find a quicker path to profitability or find a new route to going private again.
(Pictured: Patrick Whitesell and Ari Emanuel, center, and other Endeavor and WME leaders ringing the opening bell of the New York Stock Exchange on April 29, 2021.)