Endeavor would’ve been the first Hollywood talent agency to be traded on the public markets, and now investors do not have the opportunity to place money alongside one of the industry’s premier businesses.
Endeavor was formed in 1995 when five partners at International Creative Management went out on their own. The company quickly became an agency powerhouse, and later merged with the legendary William Morris Agency to form WME entertainment.
So what happened?
The IPO Market Wants Simple. Endeavor Is Brilliantly Complex.
Endeavor is a unique business that offers little comparison to any other public company, making it difficult to assign it a proper valuation. It’s a broadly diversified operating company, with expertise in talent management, marketing and licensing, event management, development, distribution and sales, and direct-to-consumer products.
Endeavor’s hands are in multiple properties that consumers are familiar with. They represent hundreds of creators; finance and produce film and TV, including the English Premier League, Wimbledon, and the Ryder Cup; and sell media rights for the IOC, UFC, NFL, NHL, and Miss Universe.
Through IMG and its multiple subsidiaries, Endeavor represents massive top-name brands around the world.
There is really no other company like it, other than the various forms that John Malone’s Liberty Media has taken over the years. Arguably, one might make a partial comparison to Disney.
Part of the problem is the current IPO market likes simple ideas.
Endeavor clearly has a world-class business, with highly experienced and savvy executive talent, and an employee base that is second-to-none in Hollywood, but the company’s organizational structure is confusing, and its accounting is complex.
I also wonder if Wall Street had trouble keeping track of all of Endeavor’s businesses, and how they interrelate.
It is ridiculously counter-intuitive and unfair, but the IPO market seems to love hype-driven garbage like Beyond Meat. It’s easy to understand. It has losses, but they aren’t very large and – hey – its products taste great and are healthy. Who cares about competition or market penetration or margins? Bid the darn thing up!
Valuation Is Challenging
The perpetual challenge with Liberty Media has been how to value it. Operating Cash Flow is really the best and only way to do so, yet OCF fluctuates from quarter-to-quarter.
Endeavor’s business has the same challenge.
Endeavor had negative operating cash flow of $37.6 million in 2016 but boosted it to $216 million in 2017 and $121 million last year.
So there already existed a challenge for the market in terms of valuation. That might have been acceptable, given that Endeavor had positive operating cash flow, were valuation the only issue.
The IPO Market Got Really Cold, Really Fast
Endeavor Group Holdings
Drawdowns from IPO
Smile Direct -43%
*Equity valuation drawdown near 80%
— Lawrence McDonald (@Convertbond) September 29, 2019
Another problem is timing. WeWork’s IPO blew up, and Peloton’s IPO tanked.
The stock market as a whole is also schizophrenic now, with every new China trade war announcement causing fits, and impeachment nonsense causing additional volatility.
Endeavor Doesn’t Need to Rush its IPO
There’s no rush for Endeavor’s IPO, as far as the business is concerned. While management and employees would like to monetize their ownership, the worlds of media and content aren’t going away.
I think postponing the IPO was absolutely the right move.
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management, tells CCN.com:
“Endeavor should wait until market conditions improve. Take the time to further educate Wall Street and investors about the company. There’s no reason to rush a premier business into a market that won’t reward it with a valuation it deserves.”