King Content & Endeavor’s IPO

Endeavor has responded to a changing media landscape by investing in types of entertainment people will pay for: live events, namely sports, and premium video content.  

The prospectus does not yet provide the number of shares being offered or the amount of funding being sought. As recently as August 2017, the company was valued at $6.3 billion. 

Sports and premium content are the main objectives. In the prospectus, Endeavor points to market research that calls sports broadcasting one of the last “must-watch” television experiences that attract large sponsorship and advertising spending. In first three months of 2019, the Entertainment & Sports division’s revenue grew 49.3 percent year-over-year. 

At the same time, today’s “proliferation of acquirers of content,” from broadcast networks to online, premium services like Netflix, Hulu, and Tencent, is driving growth in its representation business. Representation revenue grew 19.8 percent in the first thee months in 2019 as compared to 2018. 

Going public allows outsiders a detailed look inside an expansive, global company. In 2018, Endeavor had net income of $316.5 million on revenues of $3.61 billion – but these numbers don’t tell the whole story. As a percent of revenue, loss from continuing operations net of tax,   deepened from 5.5 percent in 2016 to 12.8 percent in 2018. 

The 2018 profit resulted from the inclusion of $695 million of revenue from discontinued operations – it’s treated like a gain on the sale of an asset on the income statement – not ongoing, day-to-day business. That year, Endeavor merged its IMG College licensing business with Learfield Communications. 

From that deal, Endeavor received 36% of the combined companies and $399 million after Silver Lake Partners bought 13% of Learfield IMG College for which they paid $250 million. Silver Lake is an investor in Oak View Group, the owner of Pollstar and VenuesNow. 

Judging from a different metric, however, adjusted EBITDA was $551.1 million in 2018, or 15.3 percent of revenue. 

Endeavor makes adjustments to EBITDA, or earnings before interest, taxes, depreciation and amortization; not part of the acronym is stock-based expenses, adjustments to the value of certain assets, certain legal costs, expenses from equity compensation, and earn-outs given to acquired companies. 

Remove those items, many of them non-cash, and the picture of the company’s ongoing operations becomes clearer.  Metrics are tricky, though. One could argue interest ($277 million) and equity compensation ($149.1 million) are too vital to operations to be ignored. 

After all, debt – currently $4.6 billion – has allowed Endeavor to grow, and stock options are a standard way to pay executives. 

In the same way, depreciation and amortization ($366 million) are directly related to assets the company acquired to drive top-line growth.

But there’s always a fall-back metric that gets to the heart of a business: cash flow. Endeavor’s operations have been cash-flow positive at $216 million in 2017 and $121 million in 2018. 

While the IPO will allow Endeavor to raise money, exactly how much equity other parties plan on selling is unknown – especially considering the current regime can dilute their voting power only so much. 

Silver Lake Partners, a Silicon Valley private equity firm, first invested in 2012. 

The latest investment of $1.1 billion came from a Canadian pension fund and GIC Private Limited, a Singaporean sovereign-wealth fund; their ownership and voting rights are unknown since they get a single mention in the prospectus.

Endeavor’s senior executives, among them CEO Ari Emanuel and Executive Chairman Patrick Whitesell, have more than 5 percent of equity and stand to profit handsomely. 

Emanuel, Whitesell and other executive equity owners, along with Silver Lake Partners, will control “more than a majority” of the common stock’s voting rights, according to the filing.

As a result, the executives and Silver Lake will control the election of the board of directors, the approval of any sale or merger, and any action that requires the approval of shareholders. 

Endeavor’s business model can be described as “1 + 1 + 1 + 1 = 5.” Any one artist, brand, or business can get more plugged into Endeavor than working separately. Endeavor’s business goes well beyond artist or athlete representation that formed the foundation of the company. 

Today the business centers around the many facets of content, from developing television series to creating and operating events.

Take Ultimate Fighting Championship, for example. Endeavor not only owns the company, it represents athletes for movie roles and book deals, and sells media rights to television networks. 

In addition, Endeavor hosts more than 40 UFC events globally and has expanded to new markets – including Russia and China – in the last four years. 

The relationship is like a 360-degree deal musicians sign with record labels or promoters but Endeavor is large enough to keep everything in-house.  And since content is king, Endeavor Content has financed or sold more than 100 shows and films since 2017. Endeavor distributes programming ranging from the National Football League to Endeavor-owned Miss Universe. 

Its Endeavor Streaming business, formed from its 2018 acquisition of NeuLion, powers online offerings of major entertainment properties like the NFL, NBA, WWE and two Endeavor-owned properties, UFC and Professional Bull Riding.

Endeavor’s further expansion will provide more outlets for music artists: development of television shows and movies, creation of festivals, and connections with top-shelf brands. 

In addition, IMG Events operates two music festivals, both in the UK: Hampton Court Palace Festival in Surrey, England, and The Big Festival, in Kingham. 

If live events are the future of music, Endeavor can invest in any one of hundreds of music festivals around the world. Digital plays a vital role in the company’s future. 

A minor part of the 2018 revenue upswing came from Endeavor X, a new segment that houses some acquired digital businesses. 

Last year, Endeavor spent $250 million for NeuLion, a provider of digital video delivery to major sports leagues and two Endeavor companies, UFC and PBA. 

NeuLion gives Endeavor “an ideal combination of technology and client services,” CEO Emanuel said at the time.

Investments have fueled mergers and acquisitions. Silver Lake Partners invested $200 million in 2012 for a 31 percent stake – the $645 million valuation would skyrocket in the coming years.  

The deal that transformed WME was the purchase, in tandem with Silver Lake Partners, of sports agency IMG for $2.4 billion in 2014. IMG took WME into the sports and fashion worlds, with athlete and model representation, media content distribution, and the IMG Academy, a school that specializes in sports training. 

Later in 2014, the renamed WME-IMG, along with Silver Lake and private equity firm Kohlberg Kravis Roberts & Co., acquired UFC for $4 billion. Endeavor owns 50.1 percent of UFC. 

About $1.9 of the company’s long-term debt comes from financing the UFC deal. Also in 2014, WME-IMG branched out to film production by investing $250 million in movie studio Legendary Entertainment.

Japanese telecom giant Softbank invested $250 million in 2016 – although Softbank is not mentioned once in the prospectus (Silver Lake is found 143 times). 

In 2016, WME-IMG formed Endeavor China, a partnership with two private equity firms, Sequoia Capital China and FountainVest Partners, and Tencent, the Chinese technology giant. 

A relationship with Tencent provides Endeavor China with an entry into an important, developing market. 

Also in 2016, WME-IMG acquired literary agency Rabineau Wachter Sanford & Gillett as well as marketing with Fusion Marketing and IMG Live.