Endeavor IPO: Turning The Agency Business Upside Down

In 1990, futurist George Gilder published Life After Television. He set forth a vision where a global network of computers – supercharged with fiber optics — would wreak havoc on mass media, leading to user-generated content, distance learning and even smart devices. Keep in mind that he wrote this book five years before Netscape went public, heralding the Internet revolution.

One of the readers of Life After Television was Ari Emanuel, who was a senior agent at ICM (International Creative Management). According to him, in a letter to shareholders: “[The book] changed the way I thought about content and distribution. That book was a catalyst that led me to leave a large, established talent agency to start a new and nimble one.”

The result was the creation of the Endeavor Agency in 1995. But for the most part, Emanuel focused on building a traditional operation and amassed a powerful line-up of clients.

However, during the past decade or so he has transformed the company. In fact, he is now in the process of taking the company public.

This is certainly unconventional as the last talent agency to be public was ICM, back in the 1980s. Let’s face it, there’s a natural aversion to disclose compensation packages, which could provide valuable information to rivals. Another issue is that Wall Street generally does not like labor-intensive businesses. They can be extremely difficult to scale and remain profitable.

So what makes Endeavor different? Why might investors be interested? Consider that Endeavor has been aggressive in building an entertainment platform that includes a myriad of revenue streams. The IPO filing points out the following: “media rights sales, pay-per-view programming, sponsorships, subscriptions, license fees, ticket sales, profit participations, profit sharing, pay-per-view programming, commissions and strategic consulting fees, data streaming fees and tuition.”

All these come from three business segments:

  • Representation: Endeavor is the largest talent agency, providing services to over 6,000 clients – whether talent, brands or IP (Intellectual Property) owners. Note that last year the firm represented more Academy Award and Grammy winners than any agency. A key boost to this segment was the mega merger with the William Morris Agency in 2009 as well as the $2.4 billion acquisition of IMG in 2014.
  • Endeavor X: This business – which came through the acquisition of NeuLion – is primarily focused on streaming for customers like the NFL, NBA, WWE, UFC and PBR.
  • Entertainment & Sports: This is perhaps the most important business – at least for Wall Street. The segment includes the ownership of brands like Ultimate Fighting Championship (UFC), which cost a hefty $4.1 billion, the Professional Bull Riders (“PBR”), the Miami Open and Frieze. With these assets, Endeavor puts on hundreds of live events every year.

To get a sense of how all this works together synergistically, let’s take a look at the UFC. At the heart of this is the representation business, in which Endeavor helps with movie roles, book deals and modelling. Then there is the development of original content like “The Contender Series” and “UFC: Destined.” Next, the UFC gets the benefit of marketing, distribution and sales. This involves licensing arrangements, such as for apparel and fitness, and the securing of media rights – say the 7-year deal with ESPN and ESPN+. Oh, and then there is the direct-to-consumer segment, which includes the FIGHT PASS streaming service

Really doesn’t look like a typical agency, right? Definitely not. Endeavor is instead a global entertainment powerhouse. In 2018, the company was able to generate $3.6 billion in revenues, up from about $3.02 billion in the prior year, and net income of $231.3 million.

The Risks

There are certainly nagging risks with the company and the public offering. Endeavor is a complicated organization, which could make it difficult for Wall Street to understand. Usually investors prefer pure plays (say a company like Pinterest).

Endeavor also has taken on significant debt. As for the end of last year, it was at about $4.6 billion along with roughly $3.7 billion in contingent liabilities for guaranteed media payments and other obligations.

Something else: There is a history of disputes and strikes with entertainment talent. The latest involves a fight with rule changes of the Writers Guild of America.

Then again, Endeavor has the benefit of a diverse platform and massive scale – so it should be in a better position to manage these problems.

Bottom Line On the Endeavor IPO

Gauging the prospects of an upcoming IPO is extremely difficult. The markets can be fickle. Hey, how many people predicted that Beyond Meat would be the year’s highest-performing offering?

Not many.

Instead, the real test for a company is not how it does on its IPO day. Its instead about the long-term.

Now with Endeavor, it’s easy to criticize the company. And yes, there will likely be a good amount of volatility when the company trades on the NYSE.

Yet Emanuel understands that the entertainment industry is undergoing disruptive changes and that he knows that doing things the old way will no longer work. More importantly, he has a clear vision for the company – and is not afraid to pull off bold moves to make it a reality.

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