Endeavor Group Holdings Inc., the parent company of the UFC (Ultimate Fighting Championship) franchise and owner of the William Morris Agency, saw a 12% jump in share price at the opening bell on Thursday, 29 April on its trading debut, before closing above the original price of $24 per share under the ticker tape symbol EDR on NYSE.
This is the second attempt by the company to complete an initial public offering after the first was cancelled in October 2019, following WeWork’s failed attempt to IPO after financial losses mounted against the co-working space.
With this move, Endeavor is now setting its sights to take full control of the UFC and is looking to own 100% of the MMA franchise. Currently, it owns 50.1% of the UFC, as per the SEC filing.
For those who are observers or fans of UFC’s rise from a controversial sideshow to a global mainstay in combat sports, it may be a good time to wonder, how did the UFC get so big? And can the company that lists Elon Musk as one of its directors truly be a gamechanger in the entertainment industry like Netflix has?
From Representing Artists And Sportsmen To Owning Them
Endeavor Group Holdings was founded in April 2009 after the merger of the William Morris Agency and the original Endeavor Agency. Situated in Beverly Hills, California, it represented some of the biggest names in the entertainment industry like Christian Bale, Kate Beckinsale, Jessica Alba and Denzel Washington under WME.
Endeavor then led a group of private investors in a US$4 billion acquisition of the UFC in 2016, muscling into the sports entertainment business after a successful acquisition of the Miss Universe franchise from Donald Trump in 2015.
With the rise of MMA athletes like Conor McGregor, Ronda Rousey and Anderson Silva unleashing a torrent of sleek techniques and brute force in the octagon and captivating global audiences, the UFC franchise sunk its teeth into mainstream culture and took the world by storm.
How Endeavor Seeks To Use Its Newfound Capital
According to CNBC’s interview with CEO Ari Emanuel, the company plans to use the raised capital from its IPO to fuel its expansion into the burgeoning Chinese market, which he says “is going to be as big as the U.S. market”.
He also states that the company is moving from representing artists and sportsmen to owning and organising events around its superstars.
Finally, the conglomerate is reportedly launching its own set of NFTs for the UFC in June this year. This comes at a time when Endeavor is consolidating its interests in its various industries as it seeks to acquire more brands and produce more products that monetise the assets it already owns.
The Company’s Finances Are Not Much Better Than They Were In 2019
Despite owning an impressive list of sports properties and events, such as UFC, Professional Bull Riders (PBR), the Miami Open, Frieze Art Fair, New York Fashion Week and selling sports video programming on behalf of clients including the International Olympic Committee, the NFL, and NHL, Endeavor has been unable to turn a profit.
From 2017-2019, revenue grew 23% compounded annually. However, core earnings fell from -$19 million to -$371 million over the same time. Core earnings fell further, to -$508 million, in 2020. In 2020, Endeavor burned $1.3 billion in free cash flow (FCF). This cash burn is expected to be relieved as the economy reopens, but whether economic recovery can keep up with Endeavor’s fiscal expectations is another matter.
Its primary strategies of brand acquisition and event organisation are also costly affairs. The Endeavor Group has completed more than 20 mergers and acquisitions since 2014, but these endeavours have not generated any profits or shareholder value. From 2017 to 2020, operating profit after-tax (NOPAT) has fallen from $139 million to -$550 million.
Are retail investors helping Endeavor stem its bleeding?
Positioned Well, But Burdened By Debt
There is no doubt that Endeavor is well-positioned in one of the fastest-growing sectors of the entertainment industry: live sports content. Even pay-per-view boxing matches by Showtime now struggle to keep up with the hype and fanfare that the UFC is bringing to its core audiences. According to its S-1 filing, Endeavor expects its target markets to grow steadily over the next few years:
– 5% compound annual growth rate (CAGR) through 2024: global sporting events, concerts, and performing arts ticket market
– 8% CAGR through 2023: global sports media rights spend
– 12% CAGR through 2024: global sports gaming industry
– 7% CAGR through 2023: global film and television content (not live).
If Endeavor can continue to grow its flagship UFC franchise and penetrate the Chinese market successfully, it stands to gain from its impressive viewership and sports properties ownership. However, time will tell if it is able to trim expenses on its capital-intensive businesses and reduce its debt.
Even though Endeavor may boast Tesla founder Elon Musk as its board member, it does not mean that the company is free from financial woes, and its finances seem shaky for a public company. For a hardcore fan, one might argue that the UFC will buttress its balance sheet, but that would be a bold bet, wouldn’t it?
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