Endeavor Begins U.S. IPO Process

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About: Endeavor Group Holdings (EDR)
by: Donovan Jones
Summary

Endeavor has filed to raise $100 million in an IPO although the final figure may be higher.

The firm provides talent management services for individuals and content production and management services for brands.

EDR has grown topline revenue but operating margin has dropped to negative territory and the firm has a heavy debt load.

Update, June 7, 2019, 3:30 p.m.: This article has been updated and corrected after an Endeavor representative pointed to clarifications within the amended S-1.

Quick Take

Endeavor (EDR) has filed to raise gross proceeds of $100 million from a U.S. IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides global entertainment representation and content production and management for brands.

EDR is a private equity-backed firm that is growing topline revenue but showing worsening operating metrics and has a significant debt load.

Company & Customers

Beverly Hills, California-based Endeavor was founded in 1995 as a global celebrity sports and brand agency.

Management is headed by CEO Ariel Emanuel, who was previously Senior Agent at International Creative Management.

Besides providing access to talent, such as actors, musicians, models, athletes and writers, Endeavor also provides content production and management services to various consumer product companies, sports federations and properties, global broadcasters, digital companies, television shows, films, books, podcasts as well as video games.

The firm's assets include UFC, Professional Bull Riders, as well as the Miami Open and Frieze.

Selling, G&A expenses as a percentage of revenue have been dropping as revenue has increased, per the table below:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

2018

45.2%

2017

45.9%

2016

50.2%

Sources: Company registration statement and IPO Edge

Market & Competition

According to a 2018 market research report by IBIS World, the US celebrity and sports agents market was expected to reach $11 billion in 2018, growing at a CAGR of 5% between 2013 and 2018.

The main factor driving market growth is the increase in disposable income from consumers of media and products.

The market depends on the vitality of many entertainment and sports industries, which depends on the aggregate consumer spending on various disposable items, such as movie and sports tickets as well as artist merchandise.

Major competitors that provide talent management services include:

  • Creative Artists Agency

  • United Talent Agency

Source: Sentieo

Financial Performance

Endeavor's recent financial results can be summarized as follows:

  • Increasing topline revenue, although at a decelerating rate

  • Increased operating losses and negative operating margin

  • Fluctuating cash flow from operations

Below are relevant financial metrics derived from the firm's registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$ 3,613,478,000

19.6%

2017

$ 3,020,116,000

27.6%

2016

$ 2,366,960,000

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2018

$ (107,419,000)

-3.0%

2017

$ (58,125,000)

-1.9%

2016

$ 2,846,000

0.1%

Net Income (Loss)

Period

Net Income (Loss)

2018

$ 316,545,000

2017

$ (61,249,000)

2016

$ (39,899,000)

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$ 121,131,000

2017

$ 216,028,000

2016

$ (37,658,000)

Sources: Company registration statement and IPO Edge

As of March 31, 2019, the company had $499.7 million in cash and $7.0 billion in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended March 31, 2019, was a negative ($66.8 million).

IPO Details & Commentary

EDR intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, not including customary underwriter options, although the final amount will likely be higher.

There will be four classes of stock, Class A, B, X, and Y, with voting rights described below:

The Class A common stock offered hereby and the Class X common stock will have one vote per share. The Class Y common stock will have 20 votes per share. The Class B common stock will be non-voting. Our Chief Executive Officer, Ariel Emanuel, and our Executive Chairman, Patrick Whitesell, and their affiliates, together with affiliates of Silver Lake Partners will hold a majority of our issued and outstanding Class Y common stock, Class X common stock and, in the case of affiliates of Silver Lake Partners, Class A common stock after this offering and, as a group, will control more than a majority of the combined voting power of our common stock. As a result, they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and by-laws and the approval of any merger or sale of substantially all of our assets.

Post-IPO, there will be no Class B shareholders, so Class A shareholders will be the only economic rights-holding investors. Class X and Y shareholders will only have voting rights.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm's latest filing, it plans to use the net proceeds from the IPO for working capital and general corporate purposes.

Management's presentation of the company roadshow isn't available yet.

Listed underwriters of the IPO are Goldman Sachs, KKR, J.P. Morgan, Morgan Stanley, and Deutsche Bank Securities.

The firm's financials show topline revenue growth but growing losses from continuing operations inducing a decreasing operating margin.

Sales, G&A expenses as a percentage of total revenue are lower, which is a good sign for its scaling metrics, but cash flow from operations has been highly uneven.

EDR has a large and growing debt load which is common for private equity-backed firms. Furthermore, the company intends to pay distributions but only to pay the tax expenses, if any, of the operating LLC members and not to the Class A stockholders.

I'll provide a final opinion when we learn additional details from management.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.