Early Entrants: Vol. XX – Endeavor Likely Going to Market Without On Location Experiences

Editor Note: ‘Early Entrants’ is a series of sports business ‘rumblings’ before the news breaks.

Endeavor

Endeavor Likely Going to Market Without On Location Experiences

Endeavor Group Holdings, Inc. will go public (NYSE: EDR) on Friday (9.27), but it appears as if the company will do so without having closed on On Location Experiences. Remember, back on August 2nd, the WSJ reported that the talent and media conglomerate was delaying their IPO in part because it was “closing in on” an acquisition of the premium experiential hospitality provider.

One source tied to an OLE stakeholder has since told JohnWallStreet that narrative was nothing more than “a folly” – taken by the media at face value as the asset would have “sexy’d up” the debt-laden company – and said that they haven’t heard any discussions that would indicate the transaction would be completed within the next 48 hours. In fact, there’s no guarantee that a deal ever gets done; it’s not as if the NFL & co. are looking to dump the widely profitable business and a failed IPO could impact Endeavor’s interest in and/or ability to fund the purchase.

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CBS Sports “Inching Towards” Deal with Licensed Gaming Operator

ESPN (Caesars), Turner Sports (Caesars) and Fox Sports (The Stars Group) have all announced high-profile sports betting partnerships over the last seven months. A pair of well-connected gaming industry sources tell JohnWallStreet that CBS Sports is “inching towards” a deal of their own with a licensed operator. While it remains unclear who the licensee is, the “broad gaming and daily fantasy partnership” is expected to be marketing based with the licensee advertising across all of CBS’ digital assets; the deal is also expected to contain a linear component.

“Overbearing Control Owners” Add to Struggles for Limited Partners in Sacramento, Memphis

Sports Business Journal published a story on Monday entitled “Hornets sell stake, but limited partners hard to find” that focused on the struggles associated with selling non-voting minority interests in NBA teams at current valuations and the proposed fund that would buy the shares from minority partners struggling to get out of their investments. Sacramento and Memphis were cited as examples of clubs with minority shareholders hurt by the inefficient, illiquid secondary market for non-controlling team interests; OKC is another club with a limited partner(s) unable to find a buyer.

Those in Sacramento and Memphis are also facing headwinds that do not plague L.P.s in other markets. Multiple sources familiar with the league’s available investment opportunities have suggested that those two teams’ “overbearing control owners” have made what is already a difficult task even more challenging.

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Successful IPO Would Validate Endeavor’s Transition from Agency to Sports Property Owner

Endeavor

Back on May 23rd, Endeavor Group Holdings, Inc. (Endeavor) filed for a $100 million IPO. The target share price range wasn’t disclosed, but the filing indicated that the company holds a +/- $6 billion valuation. The holding co. for the boutique agency turned media conglomerate intends to trade shares on the NYSE under the symbol EDR. Goldman Sachs, KKR Capital Markets, JP Morgan Securities and Deutsche Bank AG will lead the offering.

Howie Long-Short: Once solely a Hollywood talent agency, Endeavor has spent the last decade (company merged with William Morris Agency in ’09) diversifying their business with sports and entertainment properties (see: UFC, IMG). In fact, by 2018 just +/- 36% of company revenues ($3.61 billion, +20% YoY) came from the agency side of the business.The IPO filing indicated that Ari Emanuel & Co. intend on continuing to swallow-up assets (presumably content or event-based ones), so access to additional cash and stock (that can be used as a form of currency) should prove useful.

As noted back in April, Endeavor intends on purchasing the 80% of On Location Experiences not owned by the NFL for between $650 million and $700 million. In addition to hospitality, sports betting would be a logical vertical for the company to enter. With a laundry list of high profile clients and properties like the UFC and PBR, gaming businesses could leverage what Endeavor already has in place (think: marketing, talent relations) to maximize profitability. Two sectors that the company is unlikely to invest in are eSports and digital media. A publicly traded company required to report quarterly earnings isn’t going to be buying assets with nominal EBITDA (eSports) or properties trading at revenue, not EBITDA multiples (digital media entities).

Endeavor’s M&A model has proven successful thus far, but one industry insider suggested that the company could also use some of the newfound capital at its disposal to enter the burgeoning video streaming service space – acquiring sports broadcasting rights for their OTT platform provider NeuLion. It’s unreasonable to expect the company to compete with ESPN+ or DAZN (they won’t be paying billion dollar rights fees), but it should have the resources to develop a service that stacks up competitively to the FloSports’ (closed on a $47 million series C round on Monday) of the world.

If the IPO is successful it validates the notion that agencies or service oriented businesses can (and should) make the transition to sports property owner. The UFC’s $1.5 billion deal with ESPN should provide some wind for Endeavor sails – an indication that the company can make large-scale bets and monetize them within a short amount of time – but investors are still going to have to get over Endeavor’s existing long-term debt obligations ($4.6 billion) and an operating loss north of $100 million in 2018.

Fan Marino: Endeavor’s sports-centric acquisitions to date have been single-owner entities, where the brand is bigger than the talent and they’ve been able to control all aspects of the organization (see: UFC, PBR). Few mature sports properties maintain those characteristics and even less are on the market so it’s difficult to peg potential takeover targets, but the motorsports roll-up discussed in the May 29th newsletter might fit the bill.

Smaller leagues (think: PLL) might have some of characteristics Endeavor seeks, but a $6 billion company is looking for assets that can move the needle. Don’t expect the company to buy a big four sports team, either. Too much of the revenue is derived at the league level where it would be difficult for the company to leverage resources.

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