‘Shock and Sadness’: After an IPO Delay, Where Does Endeavor Go Next?
"Shock and sadness," says an insider. That's just one description of the feeling among WME employees Thursday after word spread that its parent company, Endeavor Group, was tabling its initial public…
“Shock and sadness,” says an insider. That’s just one description of the feeling among WME employees Thursday after word spread that its parent company, Endeavor Group, was tabling its initial public offering just a day before shares were to begin trading on the New York Stock Exchange.
There was at least one audible gasp of “Holy shit!” in a hallway of the Beverly Hills headquarters of the talent agency, according to one source, and a general feeling of deflation and anger permeated the sleek office space. With most of the top Endeavor executives in New York preparing for what was supposed to be a high-profile and triumphant stock listing, people back in Los Angeles were openly asking, “What’s going to happen next?”
That’s the question that Endeavor CEO Ari Emanuel needs to answer, while also trying to figure out what exactly went wrong. (Endeavor declined to comment for this story beyond its initial statement that the company will “evaluate the timing for the proposed offering as market conditions develop.”)
At one point, Wall Street was expecting Endeavor to raise up to $900 million via its IPO (later downgraded to about $550 million), and even if it used most of that to pay down debt, it would still carry about $3 billion on its books, a massive load for a company that reported 2018 earnings of $551 million after interest, taxes, depreciation and amortization. Since merging with the William Morris Agency a decade ago, Endeavor, backed by private equity group Silver Lake Partners, has undertaken a wild growth spree, bringing on investors and debt to amass a disparate collection of assets, which include the UFC, IMG, Professional Bull Riders and various smaller entertainment and hospitality units.
“Endeavor tried to interest Wall Street in its IPO with the glitz and glamour of its various entertainment businesses, but financial analysts pierced through the glittery fog,” argues Gene Del Vecchio, author of Creating Blockbusters and an adjunct professor of marketing at the USC Marshall School of Business, who wrote a Hollywood Reporter column on June 24 titled “Why Endeavor’s IPO Numbers May Not Add Up.”
One person familiar with the IPO process says Emanuel, executive chairman Patrick Whitesell and other top executives didn’t sufficiently explain the debt, or plans to reduce it, during Endeavor’s roadshow, especially since boasting that a chunk of the IPO money would be used to acquire more assets.
“Endeavor is highly leveraged for its size, and that’s a major concern,” says Tuna Amobi, an analyst with CFRA.
Executives, though, did attempt to tout Endeavor’s diversity, including in digital technology, largely by way of its $250 million 2018 acquisition of NeuLion, which provides streaming and distribution for clients like the NFL, NBA, Univision and UFC, the latter of which Endeavor acquired for $4 billion in 2016. But in an era of Netflix, Amazon Prime Video, Hulu and soon-to-launch Apple TV+ and Disney+, Wall Street wasn’t confident in NeuLion’s prospects.
“Streaming is getting a lot of headlines, but it’s not clear how Endeavor is getting into it,” says Amobi, beyond WME striking rich deals for clients who feed the insatiable appetite of streamers. “Representation,” though, brought in $1.3 billion in 2018 revenue for Endeavor, while “sports and entertainment” accounted for $2.3 billion.
Observers also suggest that Endeavor was too bold by seeking up to $32 a share for 19 million of them before ratcheting it down to as low as $26 for 15 million shares, especially when large IPOs like Uber and Peloton have stumbled out of the gate. “The timing was bad, and that’s a large range of pricing for their shares, which suggests trepidation from the bankers,” says Amobi.
While WME is no longer Endeavor’s majority business, the agency’s battle with the Writers Guild of America over packaging fees and affiliate production at least added more uncertainty to the IPO, and one strategy now that the IPO is delayed may be to settle the dispute between writers and their agents. Some suggest de-consolidation and layoffs might also be in the cards sans IPO. “A path forward for Ari and Endeavor means changing its culture and aspirations. It means getting smaller by unloading units and people that are not profitable,” suggests Del Vecchio.
But that path is unlikely for the hard-charging Emanuel, who built Endeavor from a tiny talent agency to a global sports and entertainment powerhouse. One Endeavor insider suggests the strategy will be to grow the company further, perhaps taking on additional investors in an effort to achieve scale that will be more appealing to Wall Street. This person posits that while the delay is disappointing, the company did not need to go public and will continue “business as usual” until the markets “calm down” and a better case can be made to investors.
But if Endeavor attempts to raise more money for acquisitions or to pay down debt, the company won’t be valued at the $8 billion or more that it was initially hoping for via an IPO. Some say Silver Lake, which owns a large, minority stake, could either be tapped for more money or might offload all or part of its stake, perhaps even to Emanuel, should he be inclined to raise the necessary capital.
And, say some insiders, Endeavor must figure out a way to keep its top agents and executives, many of whom have accepted equity in the company in exchange for compensation or bonuses. Now that they won’t be getting a hefty windfall from an IPO (at least for now), Endeavor is said to be considering ways to let key employees liquidate their stakes in the company should they choose to do so. An Endeavor insider notes that employees would have had to wait a year to cash out their stakes even if the IPO had been successful, so a further delay might not sting as much as one might think.
“You keep agents by being creative. You give the things they can’t get elsewhere,” says Jimmy Schaeffler of the Carmel Group.
Still, the delay represents an embarrassing and potentially calamitous setback for Emanuel, and a cautionary tale for other Hollywood companies seeking to go public.
“I’m not surprised they canceled the IPO,” says Amobi, “and I can’t imagine another talent agency going forward with an IPO. The handwriting is on the wall.” Adds Schaeffler: “Big waves are coming at Endeavor from every side. One of those is what I suspect will be a new trend: skittish investors.”
This article was originally published by The Hollywood Reporter.