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IPO Report: William Morris parent Endeavor is efforting an IPO again, in spite of COVID disruptions to its key businesses

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Endeavor Group Holdings Inc., the Los Angeles–based entertainment powerhouse and owner of the William Morris Agency, sports and modeling agency IMG and mixed-martial-arts outfit UFC, is making a second attempt to go public after filing paperwork with the Securities and Exchange Commission this week.

A previous effort to complete an initial public offering was canceled in October of 2019, following pushback from investors who were put off by its complicated finances at a time when other deals were flopping.

The timing is unusual for this second bid, too, given that the company has taken quite a hit during the pandemic, which halted live events and TV and film production — the businesses Endeavor relies upon to make money.

“While we believe the long-term value of premium intellectual property, content, and experiences is enduring, the near-term impact to our business as a result of COVID-19 has been significant,” the company acknowledges in its filing documents.

Endeavor
EDR,
+4.98%

is now betting heavily on UFC’s future and intends to use proceeds of the deal and a $1.7 billion private placement with private-equity firms to acquire the 49.9% stake in UFC that it doesn’t already own. That stake was snapped up by Silver Lake Partners and KKR
KKR,
+3.07%

when Endeavor purchased a 50.1% stake in UFC in 2016. If it fails to raise that sum and fails to go public, that deal will not go ahead, the company says in its prospectus.


Endeavor mentions the word streaming 62 times in its new IPO prospectus, up from 42 last time around.

UFC was the first major American sport to resume live events in 2020.

In another move that has caught attention, Tesla Inc.
TSLA,
-0.93%

Chief Executive Elon Musk is joining the Endeavor board.

“His name carries a lot of weight with retail investors,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital, a provider of IPO ETFs and institutional research.

Retail investors have contributed to the more than 628% rise in Tesla shares over the last year and the accompanying mania for all electric-vehicle companies and their suppliers.

“This will be pitched as a ‘postpandemic’ growth story about consumers eager to once again go to live events,” said Kennedy. “That’s not to say they won’t also emphasize their digital presence, which is always top-of-mind for investors evaluating growth [and] margins.”

In fact, Endeavor mentions the word streaming 62 times in the offering prospectus, up from 42 last time around, he said.

See also: IPO market cools as sentiment moves from ‘wildly overoptimistic to optimistic’

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 financials look shaky in the pandemic world. Its net loss widened to $625 million in 2020 from $530.7 million in 2019, the prospectus shows. Revenue shrank to $3.479 billion from $4.571.0 billion.

Endeavor has applied to list on the New York Stock Exchange, under the ticker symbol “EDR.” There are 22 banks underwriting the deal, led by Morgan Stanley and Goldman Sachs.

The following are five things to know about Endeavor ahead of its IPO.

Endeavor is a company with highly complex accounting

Endeavor’s latest prospectus seeks to make its sprawling financial reporting more transparent, by breaking the business down into three segments: owned sports properties; events, experiences and rights; and representation. As it did in 2019, the company presents that structure as one that is designed to help clients of William Morris and IMG take advantage of opportunities in an increasingly direct-to-consumer world.

“The events of 2020 reminded us of the enduring value of premium intellectual property and content, while reinforcing the strength of our position within the sports and entertainment ecosystem,” Chief Executive Ari Emanuel wrote in a letter included in the prospectus.

But the company’s accounting remains highly complex and includes many discontinued operations, write-offs, depreciation from owned franchises and revalued assets. The company has more than 6,400 employees working in 28 countries.

It also has huge upfront costs in acquiring the rights to content that may in the end not resonate with consumers, whose tastes change all the time, the company says in its risk factors. For example, as of Dec. 31, the company has committed to spending about $2.2 billion in guaranteed payments for media, event or other representation rights and similar expenses, “regardless of our ability to profit from these rights.” 

It continues: “Specifically, our results of operations have been negatively impacted in the years ended December 31 [in] 2020 and 2019 due to the costs associated with acquired media rights to major soccer events in excess of revenue, which will continue to adversely impact our results of operations for the term of certain of these contracts, which will all expire prior to or by the end of 2026.”

Finally, the company is planning an internal reorganization ahead of the deal through a series of transactions that will create the following org chart:

Source: Endeavor SEC filing

Endeavor’s biggest listed asset is $4 billion in goodwill

Endeavor’s largest asset on its balance sheet by far is $4.1 billion in goodwill recorded for 2020, a reflection of its highly acquisitive strategy.

“For every deal, they pay a premium over fair market value, and it’s very subjective to decide whether they are overpaying,” said Francine McKenna, an accounting expert and adjunct professor of international business at American University. (McKenna is also a former MarketWatch reporter.)

“That makes them very vulnerable to impairments if there is brand deterioration, or if an acquisition is not what they thought it would be.”

The company’s own auditors list the “significant judgments made by management” to estimate the fair value of goodwill as one they must zoom in on: “Performing auditing procedures to evaluate the reasonableness of management’s judgments
regarding the business and valuation assumptions utilized in the valuation model, particularly the forecasts of future revenue growth rates and profit margins and the selection of the discount rate, required a high degree of auditor judgment and an
increased extent of effort, including the need to involve our fair value specialists.”

Endeavor’s debt has grown since the last time it tried to go public

Endeavor remains highly leveraged, with long-term debt of $5.9 billion at the end of 2020, compared with about $4.5 billion a year before. Interest expenses were $284.6 million in 2020, wider than the $270.9 million recorded in 2019.

Operating expenses of $3.632 billion exceeded the 2020 revenue number of $3.479 billion, and the company’s operating loss came to $153.2 million. That was less than the $210.5 million operating loss posted in 2019 but wider than the $107.4 million operating loss from 2018.

“But that doesn’t stop Endeavor from consistently using non-GAAP metrics such as adjusted net income and adjusted EBITDA to turn losses into reported profits,” said McKenna.

The company says its adjusted EBITDA — or earnings before interesting, taxes, depreciation and amortization — came to $585.5 million in 2020 after $773.5 million in 2019.

The company defines its adjusted EBITDA, an already adjusted number, as excluding the following: “discontinued operations, income taxes, net interest expense, depreciation and amortization, equity-based compensation, merger, acquisition and earn-out costs, certain legal costs, restructuring, severance and impairment charges, certain non-cash fair value adjustments, certain equity earnings, costs related to canceled events recognized in excess of insurance recoveries, and other COVID-19 related expenses and certain other items identified as affecting comparability, when applicable.” Quite.

Shareholders will have very little say in running the company

As it did in 2019, Endeavor is planning to list with more than one class of stock — this time that means five classes, compared with four classes last time.

Endeavor will have Class A, Class B, Class C, Class X and Class Y shares, each carrying different voting rights. The Class A and Class X shares will carry one vote per share, while the Class Y shares will carry 20 votes per share. The Class B and Class C stock will have no voting rights.

Emanuel and Executive Chairman Patrick Whitesell and their affiliates, along with affiliates of Silver Lake, will hold a majority of the Class Y and Class X stock after the offering, vouchsafing their control of the company. Their interests may not align with those of other shareholders.

“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,” says the prospectus.

As a controlled company, Endeavor is exempt from certain corporate-governance requirements and can elect not to have a board of directors composed mostly of independents, can choose not to create a compensation committee or ensure that compensation is determined or recommended by the board.

And as the company is loss-making, it has no plans, or ability, to pay a dividend any time soon. That means shareholders will have to rely on share-price appreciation for any returns 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 ” diversity, inclusion, and equality across our platform — content, clients, and employees.”

Yet it has just one woman in its C-suite and a single female independent director.

Kerry Chandler is the company’s chief human-resources officer, while the board of directors includes Fawn Weaver, founder and chief executive of Uncle Nearest Inc., a maker of premium American whiskey. Weaver, who is African-American, is also founder and chairman of the Nearest Green Foundation and served as an executive board member of Meet Each Need With Dignity and Slavery No More.

Mark Hulbert: Stock investors can only hope the post-COVID 2020s aren’t like the ‘Roaring ’20s’

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