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Volume 22 No. 38
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Endeavor earnings offer insight to expected IPO

Endeavor Group Holdings released second-quarter earnings results late last month, giving prospective investors another look behind the curtain ahead of its upcoming initial public offering. While the company’s financials have improved, it still may not be enough to ease the concerns of investors.

In early August, the privately held conglomerate that owns the UFC and IMG and negotiates media rights distribution deals for the NFL and IOC, among others, opted to postpone its IPO for at least a few weeks. Multiple reports said the delay was to give Endeavor time to finalize a $700 million acquisition of On Location Experiences.

Endeavor’s earnings results showed $2.05 billion in first-half revenue, which exceeded analyst expectations and should put to rest any doubt that the company wouldn’t have enough to go public. However, Endeavor also reported $4.6 billion of debt and $7.2 billion in liabilities, and Wall Street wisdom holds that such substantial figures would cause investors to be hesitant.

If Endeavor fails to go to market before the end of Q1 in 2020, it’s unlikely to do so until after next November’s elections because of the anticipated unpredictability in the marketplace, according to the former head of a media rights consulting division at a competing agency. Geopolitical issues in China and the recency bias that developed in the wake of Wanda Group’s IPO flop have created an environment that is not conducive to a U.S.-based business targeting global buyers.

Further concerns among industry insiders center around the headwinds facing the entertainment and sports division, which is responsible for 65% of the company’s revenue. Margins across the industry are shrinking and rights owners are electing to deal directly with both broadcasters and the consumer rather than with an agency. 

Still, the company’s position as the dominant player in the media rights distribution space affords it the pricing power that its competitors lack, said a source. 

Endeavor’s talent representation division generated $688 million during the first half of 2019. That represents an 18.2% year-over-year increase but just one-third of total revenue.

The company’s third arm, Endeavor X, “a portfolio of digitally-focused, direct-to-consumer and business-to-business offerings” according to its May SEC filing, grew income by over 300%, to $57.4 million, during the most recent six-month period. A source described Endeavor X as a “mini BAMTech,” the streaming platform that Disney purchased a majority stake in from MLB in 2017 at a $3.75 billion valuation.

With an adjusted EBITDA of $249.7 million through six months, Endeavor is operating at roughly 13% margins, well within the 10%-20% range expected from the lower-margin agency business. An On Location Experiences acquisition would increase EBITDA by roughly 25% and aligns with the company’s transition from a predominantly service-based business to one looking to own more intellectual property.

The Wall Street Journal reported that Endeavor intends on raising more than $500 million at a valuation between $7 billion and $8 billion. Goldman Sachs, KKR, JPMorgan, Morgan Stanley and Deutsche Bank will underwrite the IPO.