- Overview of Endeavor and its financial health
- A turbulent year for majority of the unicorns going for IPO
- Why it might still had been a good idea for the company to shelve its IPO?
Endeavor Holding Group, one of the biggest entertainment, sports and content company cancelled its plan for its Initial Public Offering (IPO) just a day before it was set to launch, the latest in a series of a high-profile IPO bust, showing further signs that the IPO market in the US is slowing. Endeavour, a Hollywood powerhouse that owns talent agency IMG and martial arts organization UFC, among other businesses had already cut down its proposed IPO offering from 19.4 million shares (priced between $30 to $32) to 15 million shares (priced between $26 to $27) following resistance from market and analysts. This also reduced the targeted capital raise for the company from about $550-$600 million to ~$360 million. If the IPO would have had sailed through, Endeavor’s market cap was expected to start out from about $6.5 billion, with its enterprise value pegged somewhere between $10 - $10.5 billion. The cancellation comes at a time when other similarly valuable companies such as We Co., the parent company of the office-space company WeWork, postponed its IPO and forced its CEO to step down amid concerns over its high losses, leverage and corporate governance practices. The news on Endeavor also comes at a time when the highly touted IPO for the interactive fitness company Peloton bombed at the market, with its shares sliding ~10% below its initial price of $29 on the opening day and currently trading at a price of $23.52.
Looking into the financial health of Endeavor, its S-1 filings with the Securities and Exchange Commission on May 23, 2019, showed some serious weakness. The company had expanded rapidly over the past five to six years through acquisition, did not generate any profits in 2016 and 2017, and only reported a profit in 2018 following the sale of the IMG college division. This asset also came under Endeavor’s portfolio only through its reported $2.1 billion purchase of sports and events company IMG in 2014. Also, with a cash balance of $500 million against a debt of $4.6 billion, the company will need a huge improvement in its cash flows to finance its higher payments, which it is going to face in the coming years. The payment schedule of the company suggests that its obligations will accelerate come 2022 and 2023. With debt hovering around $5 billion or in other words, almost 8 times of the company’s EBITDA, it is not something to be overlooked. In its disclosure Endeavor emphasized on its adjusted EBITDA to measure the health of the company (a common metric used by companies preparing for IPOs to eliminate one-time gains and losses). But for a company like Endeavor, which incurs sizeable M&A related expenses with its numerous integrations, acquisitions and absorption, the adjusted EBITDA itself does not show a clear picture of the company’s performance, since such expenses come as a part of capital expenditure and not the expenses – M&A is part of the company’s core business strategy. With the company reporting losses year after year, shows a far less than perfect picture than what is being reflected through its adjusted EBITDA. Also, some figures which are notably visible in the company’s S-1 filing and should be taken into consideration while evaluating the overall financial stand of the company is the $150 million stock-based compensation and the ~$300 million amortization of intangible assets of the company in 2018 itself.
From the market’s perspective, this year hasn’t been the best for the unicorns (startups valued more than $1 billion dollar). From ride-hailing giants like Uber to other unicorns, the newly public companies of 2019 are struggling despite their rise to cultural importance, with many of them having less than stellar performance after going public. Some of the many reasons why the investors are avoiding the once-popular investments in these unicorns includes: weak margins – many of this year’s unicorns are struggling to reach profitability, a key aspect sought by investors and is sending their stock prices on a downward spiral. Alongside, uncertain macro ecosystem – recession fears and economic slowdown on many major economies have continued to drive the market volatility, keeping the investors on their toes.
With the increasing uncertainties and many of the newly launched stocks performing below expectations, Endeavor’s decision to revisit the plans for its IPO in 2020 if the market condition improves, seems reasonable. Also, Endeavor is a unique business (and would have been the first Hollywood talent agency to go public), where comparing its business to any other public company might not bring out a fair and proper valuation. It is a very diversified company with expertise across talent management, event management, marketing & licensing and direct-to-customers products in its array of offerings. It should wait for a more stable market condition, besides looking for strategies to mend its margin, leverage position and come back in a much stronger way.
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