Back on March 31, Endeavor Group Holdings filed an S-1 with the SEC that indicated the company had entered into an agreement to buy the 49.9% of UFC it does not own, as part of its renewed bid to go public. You may recall the Hollywood conglomerate was set to IPO in September 2019 before market conditions (largely tied to the WeWork debacle) drove the company to reverse course for the second time that year. Investor concerns about the company’s lack of profits, debt load and convoluted business model seemingly made it easier to call off the stock offering. So, with the pandemic having only exacerbated Endeavor’s financial struggles since (see: net loss of $625.3 million in 2020), it is reasonable to wonder why the company believes investors will react differently to an IPO this time around. Conversations with several investment bankers and academics pointed to market timing and a pair of promising acquisitions made over the last 18 months (including the UFC buyout referenced above). “If timing is everything, some of [the reason for pulling it back in 2019] is they just got caught up in the wrong moment in time,” said Scott Rosner (academic director, Sports Management Program, Columbia University). “The idea they could exercise full ownership over the UFC should help a lot [too].”
Our Take: Market conditions have certainly changed since Endeavor took its last swing at going public. Remember, in addition to The We Company’s epic IPO bust, there were a series of poor debuts (see: Peloton, Uber, Lyft and SmileDirectClub) in the months leading up to Endeavor’s planned public offering that “caused some hesitance in the marketplace,” Rosner said. Any concerns that existed at the time are long gone. “The SPAC and IPO market is much hotter now, and it is simply a better time [to be going public]—even with the company negatively impacted by COVID,” said Andrew Kline (managing director, Park Lane). The sports banker suggested investors would give Endeavor a pass for 2020, much like they have for Airbnb, “because there’s not much anyone can do when their entire industry gets shut down.”
There are also a lot more retail investors playing the stock market today, which should bode well for the sports and entertainment conglomerate (even if the company does not have the growth prospects the WallStreetBets crowd tends to desire). “[Investing in Endeavor] is investing in a super sexy, super exciting [business]. This is not investing in a boring B2B company that no one has ever heard of. [Endeavor] enables the public to invest in the UFC and in Hollywood,” Kline said. The addition of Elon Musk to the board gives the company another shiny object to sway retail investors. “You know he is going to be a driver of publicity, interest and intrigue,” said one investment banker, who asked to remain anonymous.
Endeavor’s underlying business appears stronger now than it did 18 months ago, too. Its stake in UFC was viewed by the market as a real positive in 2019. “If [investors] believe in the UFC and what their growth trajectory and future look like (think: media rights, sports betting), would [they] rather own 100 percent of it than 51 percent?” Rosner asked. Owning the UFC outright (think: boosts to cash flow and profitability), combined with the promotion’s strong performance during the pandemic relative to other sports properties, differentiates this offering from the last time around. The company seemingly believes the additional UFC equity enhances its offering. The day it signed the agreement to buy out UFC (Feb. 16), Endeavor then filed its prospectus with the SEC.
The 2020 acquisition of On Location Experiences is viewed as another positive development for the company. The anonymous investment banker referenced that specifically, saying, “While last year was a tough year for [the business], they are a dominant provider in the premium event space and should do well coming out of the pandemic.”
One of the narratives that hampered Endeavor’s efforts to go public back in 2019 was that it carried too much debt. The company has only become more extended since from a leverage standpoint, leaving skeptics to wonder how they’ll ever get out from under the $5.7 billion (as of Dec. 31, 2020) in outstanding debt liabilities it claimed on the S-1. But believers note the vast majority of that debt isn’t due until after 2025 (so there should not be any immediate problems on the horizon) and insist if the company managed to come out of the pandemic better-positioned, then concerns are overblown. It’s worth noting that Endeavor is not taking on additional debt to purchase the outstanding shares of UFC; they’re buying the percentage they don’t own with company shares and using funding raised from a private placement.
Endeavor’s S-1 filing seemingly indicates there will be strong investor interest in the offering. Historically speaking, IPOs tend to perform well when big-name, respected Wall Street investors buy in early in the process. And Endeavor has already managed to sign up $1.8 billion in private placements from shops like Third Point Management, Elliott Management and Tencent. Their participation is viewed as a sign of confidence the company will be able to get the listing over the finish line this time.
While the bevy of big name investors may indicate Endeavor is positioned to go through with the IPO, it remains possible the company could go public via a SPAC deal. Remember, back in 2019 the company was trying to raise $400 million at roughly a $6.5 billion valuation (the amount they are currently seeking to raise has not been specified). Rosner pointed out that $400 million is “right in the zone” for SPACs, and there is no shortage of them looking to invest in sports and entertainment assets.