Endeavor Group Takes Aim At Second IPO Attempt

Summary

• Endeavor Group Holdings has filed to raise investment capital in its second attempt at an IPO.
• The firm provides talent representation, events, and related entertainment services.
• EDR has been negatively affected by the COVID-19 pandemic but is positioned to return to growth as the pandemic wanes.
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Photo by LightFieldStudios/iStock via Getty Images

Quick Take

Endeavor Group Holdings (NYSE:EDR) has filed to raise $100 million in an IPO of its Class A shares, per an S-1 registration statement.

The company provides a range of talent representation, events, entertainment, and related IP services.

EDR has been negatively affected by the COVID-19 pandemic but produced reasonable results despite those challenges.

I’ll provide a final opinion when we learn more about the IPO.

Company & Business

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 access 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 risen as revenue has decreased, per the table below:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
2020	41.5%
2019	38.4%

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Sources: Company registration statement and IPO Edge

The sales efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was negative (0.8x) in the most recent period.

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

Financial Performance

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

• Contracting total revenue

• Reduced gross profit but slightly increased gross margin

• A swing to operating loss and negative operating margin

• Sharply reduced cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 3,478,743,000	-23.9%
2019	$ 4,570,970,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2020	$ 1,733,468,000	-22.9%
2019	$ 2,247,701,000
Gross Margin
Period	Gross Margin
2020	49.83%
2019	49.17%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2020	$ (153,218,000)	-4.4%
2019	$ 210,536,000	4.6%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ (654,934,000)
2019	$ (553,819,000)
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ 161,218,000
2019	$ 397,903,000
(Glossary Of Terms)

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As of December 31, 2020, the company had $1 billion in cash and $8.5 billion in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended December 31, 2020, was $89.6 million.

IPO Details

EDR has filed to raise $100 million in an IPO, although the final figure may be as high as $500 million.

Management plans to also sell shares in concurrent private placements.

The firm will have five classes of stock post-IPO:

Class of Common Stock	Votes	Economic Rights
Class A	1	Yes
Class B	None	Yes
Class C	None	Yes
Class X	1	None
Class Y	20	None

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The founders and private equity investor Silver Lake Partners will retain the Class Y shares, giving them voting control of the company even after losing economic control.

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

Per the firm’s most recent regulatory filing, it plans to use the net proceeds to purchase the operating company units and as follows:

We intend to cause Endeavor Operating Company to use the remaining net proceeds we contribute to it from this offering and the concurrent private placements for working capital and general corporate purposes. We may also use a portion of the net proceeds from this offering and the concurrent private placements for acquisitions of complementary businesses or other assets.

Management’s presentation of the company roadshow is not available.

Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs, KKR, J.P. Morgan, Deutsche Bank Securities, Barclays, Citigroup, Credit Suisse, RBC Capital Markets, UBS Investment Bank, Evercore ISI, BTIG, CODE Advisors, DBO Partners, LionTree, Moelis & Company, Piper Sandler, Academy Securities, Ramirez & Co., Siebert Williams Shank, Jefferies and HSBC.

Commentary

Endeavor is attempting to go public a second time after a previous failed attempt in late 2019.

Since then, the firm has suffered the negative effects of the COVID-19 pandemic on the entertainment and events industry.

In 2020, EDR produced contracting topline revenue, reduced gross profit and a swing to operating losses. Cash flow from operations dropped but is still significant.

But prior to the previous IPO and ensuing pandemic, the Endeavor was growing topline revenue markedly, up 36.5% for the six months ended June 30, 2019.

The firm generated $89 million in free cash flow in 2020 despite the pandemic.

However, EDR has significant debt and does not intend to use the IPO’s proceeds to pay down that debt, whereas in its previous attempt to IPO it did plan to use some of the proceeds to lower its debt burden.

The market opportunities for the firm’s various business segments are large and forecast to grow as the demand for media in all forms rebounds as the pandemic’s effects wane over the period ahead.

The company faces direct competition from other privately held firms in the talent representation business, although it has competition from other forms of media in the events and other spaces.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 43.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.

Endeavor is a bit of an unusual combination of segments, so the firm doesn’t have a direct competitor that matches all of its segments.

EDR is arguably in a more challenging financial position than when it previously attempted an IPO, but the firm has weathered the pandemic reasonably well.

Valuation assumptions will be critical and I’ll provide an update when we learn those details.

Expected IPO Pricing Date: To be announced.

Analyst’s 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.