Geopolitics, Recency Bias and Pending OLE Transaction Force Endeavor to Delay IPO
Endeavor Group Holdings (Endeavor) has announced it plans to delay the company’s IPO until the fall season. September is now the earliest that the public will have the chance to buy into the entertainment and marketing company. Endeavor hopes to finalize the $700 million acquisition of On Location Experiences before going to market at a $7 billion to $8 billion valuation. The Wall Street Journal reported that the company intends on raising more than $500 million.
Howie Long-Short: Endeavor’s decision to postpone their IPO was a wise one. The market remains in flux with a Chinese trade war (currency war) looming and with the currency exchange rate also in significant flux day-to-day, it's becoming increasingly difficult to forecast foreign exchange rates relative to currency (i.e. dollars vs. Renminbi vs. Yen). Now is not the right time for a U.S. company - particularly one that has SoftBank as an investor - to introduce an IPO targeting global buyers. There would likely be a recency bias at play here as well. Institutional investors that watched the Wanda Sports Group IPO flop are certainly wondering how Endeavor is any different; in their eyes, they're both debt laden (will owe $3.1 billion after paying down hundreds of millions in debt post IPO) agency businesses.
Timing aside, Endeavor is a highly leveraged business that needs to find a path to long-term profitability. The company reported just $231 million in 2018 net income (on $3.61 billion in revenue) after four straight years of posting losses. Bumping the IPO into Q3 will allow the company to show its Q2 earnings results. Assuming they're on an upward swing, it should help the company's pre-IPO valuation.
The perception that Endeavor is a talent business is inaccurate. Historically speaking, WME-IMG generated much of their revenue from television (think: re-licensing and production). But the emergence of OTT has compromised the licensing business and AI-based production (see: ability to create content with fewer cameras and people) has rapidly cut into profits on that side of the operation. An ongoing battle with the Writers Guild of America over “the future of packaging fees and affiliated production” is indicative of a changing business. As it currently stands, Endeavor generates more money from negotiating media deals than from any other revenue stream.
As long reported, Endeavor would like to acquire the 80% of On Location Experiences that is not owned by the NFL before filing. The price being floated and the prospect of taking on additional debt has scared the company off to date, but the chance to diversify their portfolio with a high-end hospitality and live events company, while increasing revenues remains appealing.
Fan Marino: The UFC is among Endeavor’s most valuable assets, so news that the company plans to introduce Zuffa boxing - a promotion to be led by Dana White - is significant. One high profile boxing insider told JohnWallStreet that if Zuffa is willing to build the next generation of boxers organically - as opposed to buying an established stable of fighters - there’s no reason that they can’t replicate what they've done in MMA. There is no single dominant promotion in the boxing space, live sports content remains in demand and “[Endeavor] has tremendously sophisticated marketers. This is an opportunity to reimagine the sport. Drug testing, health insurance, the number of rounds, the size of the gloves; it can be a blank canvas."
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