What’s Behind Endeavor’s Talk of Going Private, Selling Assets | Analysis

Endeavor Group Holdings shook up Hollywood on Wednesday after saying it would evaluate “strategic alternatives” such as selling off pieces of the Los Angeles-based company or — as majority owner Silver Lake said — taking the company private.

For a company that only went public in 2021, that would be quite a move and the timing was notable, just ahead of earnings on Nov. 8.

Wall Street analysts agreed that the company — which includes Willam Morris Endeavor, sports entities UFC and WWE and IMG among other holdings — are significantly undervalued at a market cap of $10.6 billion at Thursday’s close. CEO Ari Emanuel says it’s because he has to play by the rules of the public market, unlike his competitor CAA. But could Endeavor and Wall Street’s valuation gap also be the result of a brand identity problem?

“The lack of articulating both a cogent capital allocation strategy and the value of platform value synergies” is hurting Endeavor, said TD Cowen analyst Stephen Glagola, who maintains an outperform rating and $28 price target on the company’s stock.

Investors also have a hard time “forecasting diverse sports/entertainment business holdings with lack of KPIs” and the company faces a $5 billion debt load that “needs to be refinanced in a potential elevated interest rate environment over the next 2-3 years,” he added.

A Fast Pivot

Just 30 short months after superagent Emanuel achieved an historic goal by taking a talent agency public, Endeavor is facing another existential moment: a challenged environment for movies and television due to actor and writer strikes, which have added to the pressure on Endeavor’s shares.

Bank of America analyst Jessica Reif Erlich, who has a buy rating and $32 price target on Endeavor stock, said in a note to clients on Thursday that the company’s strategic review is “not overly surprising given the significant disconnect between the value public markets are ascribing to EDR’s asset base vs. what public/private transactions would suggest EDR’s assets are worth.”

Shares of Endeavor, which surged over 20% in after-hours trading on the news Wednesday evening, extended their gains another 25% on Thursday, closing at $22.26 apiece. Still, despite its $10.64 billion market capitalization, the company’s shares are down 19% since going public in April 2021.

Maximizing Shareholder Value

During an interview at Bloomberg’s Screentime conference earlier this month, Emanuel said that the William Morris Endeavor owner is a “better business” than rival CAA, which was recently sold to Artémis founder François-Henri Pinault in a deal reportedly valued at $7 billion.

Nonetheless, Emanuel couldn’t help sounding wounded as he spun out his undervaluation thesis.

“They got valued at 15 times [revenue] for the agency business. Quint — which is an experiences business, same as my business On Location — just got valued about 15 times [in its September sale to Liberty Media],” he said. “I just sold IMG Academy, which I got zero value for, for $1.2 billion. I sold my production company for a billion dollars and and then I have a betting business in Open Bet. I’m not getting any credit for any of those things.”

He added: “I actually don’t expect it to be 15 times because that’s the private market. It shouldn’t be one and a half times. Give me six [times revenue for a valuation]. I got kids to feed.”

(Emanuel’s children are probably fine. His pay was $19 million in 2022 and $300 million in 2021 thanks mostly to a one-time stock grant tied to the company’s IPO.)

Emanuel reiterated that sentiment on Wednesday evening, saying the strategic review was “a prudent approach to ensure we are maximizing value for our shareholders” given “the continued dislocation between Endeavor’s public market value and the intrinsic value of Endeavor’s underlying assets.”

Reilly Newman, a brand strategist and founder of Motif Brands, said the primary issue Endeavor faces in its valuation disconnect with the market is that it’s viewed as a general holding company.

“Considering the assets they have in specialty sports, IP, talent, fashion, and technology, they have the ability to reposition themselves as an entertainment and lifestyle brand,” he said.

“Taking Endeavor private may empower the brand to focus on a refinement such as this and rise as a lifestyle brand that represents and markets accordingly,” Newman continued. “The market evaluation is a reflection of the lack of vision portrayed as well as the perception of such through the eyes of investors.”

Glagola views the announcements as a “positive catalyst in unlocking non-TKO asset value.” (TKO Group Holdings owns and operates the Ultimate Fighting Championship and World Wrestling Entertainment.) The firm, which says the non-TKO assets are “significantly undervalued,” estimates a sum of the parts valuation of $7.6 billion, or $16 per share, versus $1.5 billion, or $3 per share, at Wednesday’s closing price of $17.72 per share.

Endeavor’s non-TKO assets include Willam Morris Endeavor and IMG, marketing agency 160over90, Endeavor Streaming, digital agency Seven League, Professional Bull Riders, Euroleague, OpenBet and IMG Arena.

As of Wednesday’s closing stock price of $17.72 per share, the value of the businesses combined are being are being valued at only a 19% premium to IMG Academy, which was divested at a $1.25 billion enterprise value in June, Glagola wrote in a note to clients.

“While no details were given to potential timing of a transaction, we believe obtaining a fairness opinion would be best practice under a go-private scenario,” he added. “We think other strategic alternatives being considered could include spin-offs of high-quality businesses.”

Though it’s unclear what assets Endeavor would be willing to unload, the company has emphasized that its review would not consider the sale or disposition of its 51% controlling interest in TKO Group Holdings. Shares of TKO, which has a market capitalization of $14.01 billion, ended Thursday’s trading session up 3% at $81.11 apiece.

TD Cowen estimates that Endeavor’s representation business alone is worth at least $5.5 billion.

Going Private

When a public company goes private, it is not subject to U.S. Securities and Exchange Commission filing regulations, which can free up capital from compliance and reporting costs. It also allows management to place more of a focus on a company’s long-term growth as opposed to investors’ quarterly earnings expectations.

“The fundamentals here are consistent with the fundamentals of other public to private situations where they’re probably looking just for more flexibility, more profitability and they feel like they can get greater returns doing it that way,” Chris Stafford, a partner in the mergers & acquisitions practice at West Monroe, told TheWrap.

But in some measure, he said the lack of a clear brand identity will help Endeavor if it seeks to sell assets.

“The perception that Endeavor is this big merged-together conglomerate going private will give them the ability to split that up without negative repercussions of Wall Street reacting poorly,” Stafford said.

Silver Lake, which holds 71% of Endeavors voting power and two seats on the company’s board, has been an investor in the company since 2012 and has about $101 billion in combined assets under management and committed capital. The private equity firm is working towards making a proposal to take Endeavor private. It said it “firmly believes in Endeavor’s business” and “is not interested in selling its shares in Endeavor to a third-party nor in entertaining bids for assets that are a part of Endeavor.”

Stafford noted that the typical play of private equity investors is to “drive focus and returns on core competency businesses.” He added that a key challenge for Silver Lake will be finding other parties who would be interested in lining up financing for the deal.

“Typically, a strategic buyer is going to want all or at least controlling interest,” Stafford said. “If Silver Lake maintains controlling interest, it’s likely to be a consortium of other private equity.”

He noted that typical consortiums could range from anywhere from one to five involved parties.

In the event of a potential sale, Erlich believes Endeavor could be worth at least $30 per share. That estimate is based on $13.95 billion in total equity value, including $6.9 billion for the 51% stake of TKO and $6.9 billion for the non-TKO assets. It also reflects several of Endeavor’s businesses that are not operating under normal conditions, such as the representation business being impacted by the WGA and SAG-AFTRA strikes. But the estimate does not account for updated financials reflecting the completion of the UFC/WWE merger.

“Should corporate/other be lower than our forecast of consolidated [Endeavor] or Silverlake be required to pay a control premium for the 51% TKO stake those would both be potential upsides to our forecast,” she added.

Endeavor is set to report its earnings for the third quarter of 2023 on Nov. 8 before the market open, while TKO Group will report its quarterly earnings on Nov. 7 after the bell. Analysts surveyed by Zacks Investment Research are currently expecting Endeavor to report earnings of 27 cents per share on revenue of $1.26 billion and TKO Group to report earnings of 26 cents per share on revenue of $551 million.

Representatives for Endeavor and Silver Lake declined to comment.

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