- Endeavor blames poor trading climate for last-minute IPO delay
- Postponement raises questions about IMG’s competitiveness in rights market
- Climb-down follows weak Wanda Sports IPO in July in a bad summer for sports marketing firms
The postponement last week by Hollywood talent and sports marketing agency Endeavor of its initial public offering on the New York Stock Exchange – for the second time in two months – raises important questions for the sports industry.
On Thursday, September 26, less than 24 hours before trading was due to begin in Endeavor shares, the company postponed the IPO to an unspecified future date. It blamed unfavourable trading conditions and weak demand from investors for IPOs.
Earlier that day, the company had reset its opening share price guidance from a range of $30-$32 (€27.5-€29.3) to $25-$27 and reduced the number of shares for sale from 19.4 million to 15 million. The initial targets would have raised between $550m and $600m for the company, valuing Endeavor at about $8bn. The revised target would have raised between $360m and $430m and would have valued the business at about $6.5bn.
Endeavor’s sports assets include the IMG agency, the UFC mixed martial arts promotion, the Miami Open tennis tournament and the Professional Bull Riders organisation. It also owns talent agency WME, the Miss Universe pageant and streaming provider NeuLion.
Reaction in the sports media and marketing sectors has focused on three questions:
- How will IMG’s aggressive spending campaign be affected?
- Will Endeavor now be forced to sell off assets to raise cash?
- Taken together with the disappointing IPO of Wanda Sports in July, what does this mean for sports media and marketing vehicles generally?
Read this: The Long Read | Potential investors will do well to look closely at the football deals of Endeavor and Wanda Sports
IMG scaling back
IMG’s aggression in the sports-rights market will not be scaled down as a direct consequence of the IPO postponement for one reason, IMG insiders say. The scaling back had already been under way for months, following big overpayments on several football properties.
Despite its own disappointing performance on the stock market, where it is trading at less than half its opening-day value, the Infront agency appears to be taking advantage of the situation.
As reported in SportBusiness Review in June, Endeavor’s IPO prospectus showed three media-rights deals were dragging down IMG’s profitability. These were for: the global rights, outside Italy, to Serie A; the global rights, outside the UK, to the FA Cup; and the rights in the Nordics to Spain’s LaLiga
An informed source said this week: “IMG has already dialled down its aggressiveness. If you speak to people in the market, everyone is now talking about how aggressive Infront is in comparison. Infront is going after landmark properties and looking at long-term deals. Behind the scenes, they are approaching properties and talking huge numbers. IMG doesn’t seem to be in the game. They certainly don’t appear to be taking on the same level of risk as before.”
Six months ago, IMG insiders were keen to point out that Endeavor’s founders Ari Emanuel (pictured) and Patrick Whitesell had total faith in IMG and backed the agency’s judgement in the sports-rights market. That seems to have changed. “In the past, Ari never questioned a deal, he just signed it off,” the source said. “Now everything is under scrutiny.”
The main short-term risk to the agency, other sources say, is a flight of talent, by managers now set to miss out on an eagerly awaited pay-day.
One executive familiar with the company said that IMG was a good company to work for and “not a place that people want to leave” but that some of the younger, more ambitious, staff would now be considering their positions.
If you’re missing targets for two years in a row and then missing a pay-out from an IPO, you start asking yourself questions. ‘If I stay for an earn-out from an IPO in a year or two years’ time, it will only compensate me for the years I didn’t get the bonus’. Morale has been affected.”
However, one former IMG executive argued that the agency had dodged a bullet by not being taken public. “The old sports agency model built around events, TV and distribution is a tough business. It’s not one suited to public ownership,” he said. “You have to share too much information. The steady plod towards quarterly growth doesn’t suit the nature of the business. It’s a business where you win some and you lose some. You have to take big punts and a long-term view. And rights deals are getting longer now.”
What now for Endeavor?
In an internal email, seen by SportBusiness Review, Endeavor co-founder Emanuel told staff last week: “I wanted to let you all know that we just announced our decision not to move forward with the IPO. Over the last several weeks we have been focused on attracting long-term investors who share our vision and appropriately value our company. In the last few days, however, unfavorable market conditions have negatively impacted overall IPO investor sentiment.”
There is no question that there had been warning signals from the IPO market, both on the NYSE and the Nasdaq, during the last two quarters. A series of disappointing launches – including Wanda’s in July, and that of ride-sharing giant Uber in May – was followed by perhaps the biggest surprise of the summer: the indefinite postponement two weeks ago of the eagerly-awaited IPO of shared workspace company WeWork, which was targeting a valuation of $20bn. The day before Endeavor’s planned IPO, shares in digital fitness start-up Peloton fell by 11 per cent on the first day of trading.
One well-placed source told SportBusiness Review: “Peloton spooked everybody. After the weak ride-share IPOs and the WeWork flame-out, it was the straw that broke the camel’s back.”
However, there is one sentence in Emanuel’s email that is open to question: ‘unfavorable market conditions have negatively impacted overall IPO investor sentiment’. The question is whether all IPOs are being affected by the soft market or just certain types of company. The fact that numerous IPOs have got away successfully in New York in the last two quarters suggests it is probably the latter.
The more-high profile failures have tended to conform to a pattern: unicorn start-ups, run by digital whizz-kids who spotted something first, scaled rapidly, generated more hype than profit and tried to cash out.
Endeavor does not fit that profile. The constellation of assets it contains may have been put together recently, but the assets themselves are far from being start-ups. The William Morris agency which WME is built around was founded in 1898. IMG was founded in 1960. And none of the major stakeholders in Endeavor – Emanuel, Whitesell and private equity house Silver Lake – was selling a single share.
But for many analysts what Endeavor shares with some of the other IPO flops is an unconvincing balance sheet – a heavily-leveraged $4.6bn debt and, beneath the upbeat ‘adjusted EBITDA’ figures in the IPO filing, no clear route to real profit.
As one US media expert put it this week: “What we are seeing is the market returning to a focus on the fundamentals over hype.”
Endeavor is confident that it was not the balance sheet that caused weak market demand. All that information has been in the market since the IPO filing in May, the argument goes, with plenty of time for discussions with potential investors. “Had the balance sheet been the issue,” one insider said, “the listing would have been pulled much sooner, not 24 hours before.”
Whatever the real reason for the postponement, the question now is: where will Endeavor get the $400m it had wanted to pay down debt and continue expansion? The two most logical options are raising more funds from private capital or selling non-core assets. Insiders say it is too soon to tell if either of these options will be explored.
Analysts remain relatively sanguine about the next 12 months. One investment adviser said anyone who thought the postponement represented an existential threat to the business did not understand the nature of its main financial backer, technology investment vehicle Silver Lake, which has $43bn of assets under management.
“Silver Lake is so powerful and the funds they have access to are so huge, they really won’t care too much about not raising $400m,” he said. “And don’t be under any illusion: it’s Silver Lake running the show.”
Even with the best Hollywood scriptwriters at their disposal, it will be difficult for Emanuel and Whitesell to conjure a narrative which turns this situation into a triumph for the company. Best-case scenario is that everyone – both inside and outside the company – buys the line that nothing has really changed.
This take on events was summed up by one source close to Endeavor this week: “Going public was not going to be transformative. It wasn’t going to change the day-to-day. Not for IMG. Not for WME. Not at UFC. And holding off on this is not going to be transformative either. If the market has been spooked by these other IPOs, why go right now? There is nothing that was entirely reliant on this happening.”
Coming on the back of the disappointing Wanda IPO, the refusal to expose Endeavor to the harsh glare of the markets has inevitably led people in the sports media and marketing sectors to look for connections between the two situations.
For some, those connections are to be found in the fundamentals of the media-rights market. “Agencies built on pay-TV growth are not safe businesses and their economics tell the tale,” one senior digital media executive said. Another argued that agencies have been knowingly overspending on premium rights for several years and have not been able to refinance those investments from a broadcast sector which is facing huge challenges. A common refrain is that traditional intermediaries in a content sector pivoting increasingly to direct-to-consumer offerings face a challenge to survive long term.
One media-rights consultant said the two situations could have a domino effect on investment in sport: “Taken together, the Wanda and Endeavor IPOs cast a shadow on the business of sport, media and entertainment. There are private equity groups circling the sports media industry and they’ll be thinking this does not herald a positive outlook for our sector. Private equity looks at sectors that are buoyant, not those that appear to be trading south.”
The counter view is that traditional sports marketing activities only make up one vertical of what are big, diversified businesses, where the risk is spread widely across multiple activities.
“The rights-trading element is too small a part of the overall business for investors to be influenced by that alone. They look at the total numbers, not one vertical. And with IMG, the underlying business is solid. Some wonky projections on Serie A and the FA Cup won’t blow them off course. The broadcasting industry is in flux, but the real difficulties will be felt by lower-tier rights-holders.”
Other industry executives point out that Infront’s current assertiveness in the market undermines the idea that a difficult short-term trading position is potentially damaging to a sports marketing company.
As one well-placed insider put it: “Infront doesn’t see this as a failure at all. Inside the company there is great excitement about having gone public. [Infront chief executive Philippe] Blatter sees this as a real milestone. He’s totally convinced that the fundamentals are right and, long term, the decision to go public will be vindicated.”
For Endeavor, the gamble is that the decision not to go public – now – will also be vindicated long term.