This week, JohnWallStreet is re-running columns from the 2022 archives. Enjoy today’s selection.
Endeavor Group Holding’s (NYSE: EDR) owned sports properties segment generated $402.3 million in revenue in Q3, roughly 33% of the $1.221 billion in revenue the company brought in during the quarter.
The idea that sports would play a central role in Endeavor’s business was unfathomable as recently as the mid-2010s. “I don’t think anybody thought, even with the  acquisition of IMG, we were ultimately going to be so heavily concentrated in sports,” president Mark Shapiro said. “We didn’t even have WME Sports [at the time].”
The company’s success in growing the UFC has made that a reality, and several post-pandemic trends have positioned the sports segment to play an increasingly large role in EDR’s future.
“We like the margins. We like the business and we don’t see it slowing down,” Shapiro said.
JWS’ Take: While Endeavor has not lost sight of its other business segments, it recognizes “nothing is hotter than sports right now” and wants to capitalize accordingly. Shapiro sees the momentum in skyrocketing sports franchise valuations, the massive audiences tuning into live sports on TV, the increased demand for VIP—and VVIP—hospitality and the rising sports betting handle nationwide.
There are several strong tailwinds aiding sports’ rising tide, including a strong job market and an expanding demand for premium IP and content.
The consumer’s realization that there is no replacement for live entertainment has also served Endeavor’s sports assets well. As an example, UFC 281 was the second highest grossing event in Madison Square Garden history. “People want to get out, they want to attend events and they’ve got money to do it,” Shapiro said.
Consumers are expected to have money to spend for at least the next three quarters. A Wells Fargo report dated Dec. 1 estimated “households still have just over $1 trillion in accumulated savings through October, which is equivalent to about 6% of annual consumer spending. That translates to less than a year’s worth of excess capital remaining, as it would take households another 11 months to completely deplete this stockpile if they continued to draw it down at the $97 billion average monthly pace they have over the past six months.”
While Endeavor’s core businesses look to be strong, the threat of a recession looms large. That means cutting spending. EDR has implemented a hiring freeze on new positions and is “not writing a lot of checks when it comes to new acquisitions and investments,” Shapiro said. “You want to be prudent and conserve cash in times like this.”
Endeavor did close on its purchase of OpenBet in Q3, but that deal was struck back in September of 2021 before sports betting fell out of favor with the public markets. EDR ended up receiving a discount on the purchase price. OpenBet does not require a significant additional capital commitment from Endeavor—at least not in the short term.
“The business is profitable,” Shapiro said. “States and countries are opening up. More and more operators are getting licensed and need back-end infrastructure technology. So, we’re going to feed off that. We’re going to sign new partners and ring the cash register.”
While Endeavor does not see the current environment as being ripe to “take moon shots,” it will not let an attractive investment or acquisition opportunity slip through its fingers. The company has reflected on the growth of the UFC and the commercial recipe it developed along the way and believes it can replicate the model with other properties.
“If there is another sports league out there that has a built-in following, with a huge growth strategy and space in front of it, we’re interested,” Shapiro said. The EDR president added there are no properties that fit that description, and have displayed a proven business model, currently available on the market.
Endeavor is also interested in buying event IP. In August, Endeavor acquired a majority stake in Barrett Jackson, an auto collector auction and live-events company, and Shapiro said if there are “sports tournaments that we could get our hands around, we’re aggressively looking for those kinds of properties.”
In the meantime, Endeavor will focus on developing its core representation, events and sports businesses and deriving more value from the assets already under its control. The company expects its sport-adjacent verticals to fuel meaningful growth going forward.
“Representation has been a 30% margin business for us. Owned sports properties has been close to a 50% margin business and IMG Academy is coming off a year of record enrollment and record attendees at its camps,” Shapiro said.
The company’s sports betting (IMG Arena, OpenBet), events and hospitality (On Location, IMG Events) and experiential marketing (160over90) arms are also expected to contribute.
While the marketing and advertising industries face multiple headwinds, “Brands are shifting their budgets more and more to activation and immersion, and that’s where 160over90 comes into play,” Shapiro said.
Learfield, the college sports dealmaker backed by Endeavor, lost $1.8 billion between 2019 and 2021. But Shapiro said those losses can be attributed to events canceled during COVID-19 and are not reflective of the business’ underlying strength.
“When you’re in the business of selling brands, advertisers and marketers on engagement and reach, and there is nobody there to take in those marketing messages, you lose a lot of marketing dollars. And at the same time, they had contracts where they had all these guarantees to the schools. So, that model gets upside down pretty quickly,” he said.
Of course, Endeavor is not the only company seeking to carve out market share within sports. “IMG Media regularly faces competitors who want the distribution rights to a property and may be willing to pay more to get it,” Shapiro said. “IMG Arena is up against Sportradar and Genius Sports. CAA is coming after our clients and chasing the same new clients.”
The company’s ability to successfully retain and grow market share in each of those verticals will determine if sports can eventually overtake events and rights as the company’s most lucrative segment.