Endeavor’s IPO by William Morris: 5 things to know about the entertainment giant
Endeavor Group Holdings Inc., the Los Angeles-based entertainment powerhouse and owner of William Morris agency, sports and modeling agency IMG, and mixed martial arts company UFC, has set the price for its IPO on Wednesday at the top of its expected price range. .
The company sold 21.3 million shares, priced at $ 24 each, the top of its proposed price range of $ 23 to $ 24, raising around $ 511 million at a valuation of just over 6 billions of dollars.
A previous effort to complete an initial public offering was canceled in October 2019, following a crackdown on investors who were put off by its complicated finances at a time when other deals failed.
The timing is unusual for this second offering as well, given that the company has been hit hard during the pandemic, which has cut off live events and television and film production – the companies Endeavor relies on for money. .
“While we believe the long-term value of high-end intellectual property, content and experiences is enduring, the short-term impact on our business from COVID-19 has been significant,” the company acknowledges in its comments. filing documents.
Now is betting heavily on the future of the UFC and intends to use the proceeds of the deal and a $ 1.7 billion private placement with private equity firms to acquire 49’s stake, 9% in UFC which he does not already own. This stake was acquired by Silver Lake Partners and KKR KKR,
when Endeavor bought a 50.1% stake in UFC in 2016.
Endeavor mentions the word streaming 62 times in its new IPO prospectus, up from 42 the last time.
The UFC was the first major American sport to resume live events in 2020.
In another move that has gained attention, Tesla Inc. TSLA,
Managing Director Elon Musk joins Endeavor’s board of directors.
“His name carries a lot of weight with retail investors,” said Matthew Kennedy, senior IPO market strategist at Renaissance capital, a provider of IPOs and institutional research ETFs.
Retail investors have contributed to Tesla’s more than 628% rise in shares over the past year and the accompanying craze for all EV companies and their suppliers.
“This will be presented as a ‘post-pandemic’ growth story on consumers eager to go to live events again,” Kennedy said. âThat’s not to say they won’t also focus on their digital presence, which is always a priority for growth investors. [and] margins. “
In fact, Endeavor mentions the word streaming 62 times in the offering prospectus, up from 42 the last time, he said.
See also: IPO market cools as sentiment shifts from ‘overly bullish to bullish’
A dispute with the Writers Guild of America that acted as an overhang the last time Endeavor attempted to go public has been resolved. But the company’s financial data looks fragile in the pandemic world. Its net loss extended to $ 625 million in 2020, from $ 530.7 million in 2019, the prospectus says. Revenue declined to $ 3.479 billion from $ 4.571.0 billion.
Endeavor stock will begin trading on the New York Stock Exchange later Thursday under the symbol “EDR”. There were 22 banks underwriting the transaction, led by Morgan Stanley and Goldman Sachs.
Here are five things to know about Endeavor.
Endeavor is a very complex accounting company
Endeavor’s latest prospectus aims to make its extensive financial reporting more transparent, by dividing the activity into three segments: owned sports properties; events, experiences and rights; and representation. As it did in 2019, the company is pitching this structure as one designed to help William Morris and IMG clients take advantage of opportunities in a world that is increasingly direct to consumers.
âThe events of 2020 have reminded us of the enduring value of intellectual property and premium content, while strengthening our position within the sports and entertainment ecosystem,â wrote Managing Director Ari Emanuel. in a letter included in the prospectus.
But the company’s accounting remains very complex and includes many discontinued operations, write-offs, write-offs on franchises held and revalued assets. The company has more than 6,400 employees in 28 countries.
Acquiring the rights to the content also comes with huge upfront costs that may ultimately not resonate with consumers, whose tastes change all the time, the company explains in its risk factors. For example, as of December 31, the company has committed to spend approximately $ 2.2 billion in guaranteed payments for media, events or other performing rights and similar expenses, “regardless of our ability to profit. of these rights. ”
He continues: âMore specifically, our operating results were negatively impacted during the years ended December 31. [in] 2020 and 2019 due to costs associated with the acquisition of media rights to major football events in addition to revenues, which will continue to have a negative impact on our operating results for the duration of some of these contracts, which will all expire before or by the end of 2026. “
Finally, the company is planning an internal reorganization before the operation via a series of transactions which will create the following organizational chart:
Endeavor’s largest listed asset is $ 4 billion goodwill
By far Endeavor’s largest asset on its balance sheet is $ 4.1 billion goodwill recorded for 2020, reflecting its highly acquisitive strategy.
âFor each transaction, they pay a premium over fair market value, and it is very subjective to decide whether they are overpaying,â said Francine McKenna, a chartered accountant and adjunct professor of international business at American University. (McKenna is also a former MarketWatch reporter.)
“This makes them very vulnerable to impairment if the brand deteriorates or if an acquisition is not what they thought it would be.”
The company’s own auditors list âsignificant judgments made by managementâ in estimating the fair value of goodwill as one they should focus on: âPerform audit procedures to assess the reasonableness of judgments management
regarding the business and valuation assumptions used in the valuation model, in particular the forecasting of future growth rates of income and profit margins and the choice of discount rate, required a high degree of judgment from the company. auditor and a
increased efforts, including the need to involve our fair value specialists. “
Endeavor’s debt has risen since the last time she tried to go public
Endeavor remains heavily in debt, with long-term debt of $ 5.9 billion at the end of 2020, down from around $ 4.5 billion a year earlier. Interest expense was $ 284.6 million in 2020, higher than the $ 270.9 million recorded in 2019.
Operating expenses of $ 3.632 billion exceeded revenue of $ 3.479 billion in 2020 and the company’s operating loss was $ 153.2 million. This was less than the operating loss of $ 210.5 million recorded in 2019, but larger than the operating loss of $ 107.4 million in 2018.
âBut that doesn’t prevent Endeavor from consistently using non-GAAP metrics like adjusted net income and adjusted EBITDA to turn losses into reported profits,â McKenna said.
The company says its Adjusted EBITDA – or interesting profit before taxes, depreciation, and amortization – amounted to $ 585.5 million in 2020 from $ 773.5 million in 2019.
The company defines its adjusted EBITDA, a number already adjusted, as excluding the following items: “discontinued operations, income taxes, net interest charges, depreciation and amortization, stock compensation, merger, acquisition and supplement, certain legal fees, restructuring, severance and impairment charges, certain non-cash fair value adjustments, certain results in equity, costs related to canceled events recognized in excess of insurance recoveries, and other charges related to COVID-19 and certain other items identified as affecting comparability, if applicable. ” Enough.
Shareholders will have very little say in the management of the company
As it did in 2019, Endeavor plans to list more than one class of stock – this time that means five classes, up from four classes last time around.
Endeavor will hold Class A, Class B, Class C, Class X and Class Y shares, each with different voting rights. Class A and Class X shares will carry one vote per share, while Class Y shares will carry 20 votes per share. Class B and class C shares will have no voting rights.
Emanuel and Executive Chairman Patrick Whitesell and their affiliates, as well as the Silver Lake affiliates, will own the majority of the Class Y and Class X shares after the offer, ensuring their control of the company. Their interests may not match those of other shareholders.
“Accordingly, they will be able to control any action requiring the general approval of our shareholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and our articles, and the approval of any merger. or the sale of almost all of our assets, âsays the prospectus.
As a controlled company, Endeavor is exempt from certain corporate governance requirements and may choose not to have a predominantly independent board of directors, may choose not to establish a compensation committee, or may choose not to have a compensation committee. ensure that compensation is determined or recommended by the board.
And since the company is in deficit, it has neither the intention nor the ability to pay a dividend anytime soon. This means that shareholders will have to rely on stock price appreciation for any return on their investments.
Endeavor says it embraces diversity – but it’s not quite there
As it did last time around, Endeavor says it remains committed to âdiversity, inclusion and equality across our platform – content, customers and employeesâ.
Yet he only has one woman in his C-suite and one independent director.
Kerry Chandler is the company’s chief human resources officer, while the board of directors includes Fawn Weaver, founder and CEO of Uncle Nearest Inc., a premium American whiskey maker. Weaver, who is African American, is also the founder and president of the Nearest Green Foundation and was a member of the executive board of Meet Each Need With Dignity and Slavery No More.