Endeavor Group Finalizes Second IPO Try

$Endeavor Group Holdings Inc.(EDR)$

Summary

• Endeavor Group Holdings has filed proposed terms for a $501 million IPO.
• The firm provides talent management services, live events and related content.
• EDR seeks to emerge from the ** pandemic's negative effects on its events businesses, but the IPO looks pricey, so I'll watch it from the sidelines.
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Endeavor Group Holdings (EDR) has filed to raise $501 million from the sale of its Class A common stock in an IPO, according to an amendedregistration statement.

The company provides a range of talent management, sports and live events and related intellectual property.

EDR is seeking to emerge from the pandemic’s negative effects on its business, but the IPO is more expensive than its first IPO attempt pre-pandemic, so I'll pass on it.

Company and Business

Beverly Hills, California,-based Endeavor was founded in 1995 as a global celebrity sports and brand agency.

Management is headed by CEOAriel 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%

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 and marketing spend, was negative (0.8x) in the most recent period.

Market and Competition

According to a2018 market research reportby 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)

As of Dec. 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 Dec. 31, 2020, was $89.6 million.

IPO Details

EDR has filed to raise $501 million in an IPO, offering 21.3 million Class A shares at a proposed midpoint price of $23.50 per share.

A concurrent private placement involving 14 investors purchasing stock worth $1.8 billion is planned.

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

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 as follows:

We intend to (1) use $835.7 million of the net proceeds from this offering and the concurrent private placements to purchase Endeavor Operating Company Units (or interests in UFC Parent) directly from certain of the Other UFC Holders (or their affiliates) at a price per unit (with respect to Endeavor Operating Company Units) equal to the initial public offering price per share of Class A common stock sold in this offering and (2) contribute $951.5 million of the net proceeds from this offering and the concurrent private placements to Endeavor Manager (or $1,028.1 million if the underwriters exercise their option to purchase additional shares in full) in exchange for a number of Endeavor Manager Units equal to the contribution amount divided by the price paid by the underwriters for shares of our Class A common stock in this offering (provided that we may reduce such contribution amount, without reducing the number of Endeavor Manager Units we receive, by the amount of any expenses we pay in connection with this offering, the concurrent private placements and the UFC Buyout (which we estimate will be approximately $76.1 million) that are not otherwise paid or for which we are not otherwise reimbursed by Endeavor Operating Company).

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (ex-underwriter options) would approximate $15.8 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 5.02%.

Management’s presentation of the company roadshow isavailable here.

Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs, JPMorgan, 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., R. Seelaus & Co., Siebert Williams Shank, Jefferies and HSBC.

Commentary

Endeavor has produced contracting revenue and other financial metrics due to being hard hit by the ** pandemic.

The company’s events business was severely impacted by the ongoing health crisis.

However, EDR generated free cash flow in 2020 despite the challenging macro conditions.

Selling, G&A expenses as a percentage of total revenue rose somewhat as revenues decreased and its Selling, G&A efficiency rate was negative (0.8x) during 2020.

The market opportunities for its various business segments are substantial and expected to return to growth as demand for in-person events is expected to return starting in the summer of 2021.

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 29.2% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is a slow return of its events business if consumers are hesitant to attend events in the second half of 2021.

As for valuation, compared to the firm’s previous IPO attempt pre-pandemic in late 2019, management is asking IPO investors to pay a much higher EV/revenue multiple of 4.54xvs.2.88x on the previous attempt.

It’s proposed EV/EBITDA multiple is now a negative (103.09x) vs. its previous 32.87.

So, the IPO looks significantly more expensive despite worsened financial results from the pandemic, which is still ongoing.

My previous IPO opinion was positive, but given these new assumptions, the IPO appears overpriced, so I'll pass on it.

Expected IPO Pricing Date:April 28, 2021.