We all know how fickle the financial markets can be.
What looks, at the start of 2021, like a struggling retailer of video games during a pandemic—GameStop—with a stock price hovering around $17 a share, and a rash of short sellers hoping for a bankruptcy filing, is suddenly transformed three weeks later into a “stonk” and a cable-TV business-news sensation: Seemingly overnight, GameStop’s share price rockets up to around $350 per share, with a market valuation around $20 billion.
Forget the fundamentals. They make no sense. In the last three years, the company has lost a cumulative total of more than $1 billion in EBITDA, earnings before interest, taxes, depreciation, and amortization. Who cares? GameStop became a phenomenon, little more than an opportunity for day traders, Reddit posters, the YOLO-FOMO crowd, and hedge fund managers to fight it out on a daily basis. It’s been said we are bored. It’s been a long and devastating year. We needed a little fun. And GameStop became our collective, pre-vaccine roller-coaster ride. (These days GameStop stock seems to have stabilized around a still-absurd valuation of $11.4 billion.)
GameStop is not an isolated phenomenon, of course. There’s the $100 million, money-losing deli in New Jersey. There’s the $69 million NFT. There’s the joke cryptocurrency, Dogecoin, the value of which has increased more than 12,500% so far in 2021, to a total of $129 billion. And then there’s the more legitimate cryptocurrency, Bitcoin, which is now trading at $57,000 per coin and at a total market valuation of more than $1 trillion. There are SPACs, which, despite the bloom being a little off the rose these days, still raised in the first quarter of 2021 an astounding $93.4 billion, more than in all of 2020.
Add to this vein of general market absurdity the successful April 28 IPO of Endeavor Group Holdings, Inc., the eclectic hodgepodge of businesses—ranging from UFC, the mixed martial arts juggernaut, and bull riding to Hollywood talent and literary representation and a number of venture capital investments—assembled over the years by the impresarios Ari Emanuel and Patrick Whitesell.
You remember Endeavor, of course. Back in September 2019, Emanuel and Whitesell abandoned their first attempt at an Endeavor IPO after investors balked at valuing the equity of the company at around $8 billion. At that time Endeavor had net debt of $4.1 billion (debt less cash on the balance sheet), putting the hoped-for enterprise value of Endeavor at around $12 billion, or 46.3x Endeavor’s 2018 EBITDA of $259 million. That was clearly an indigestible EBITDA multiple for investors, so the underwriters, led by Goldman Sachs and JPMorgan Chase, did what any self-respecting underwriter would do when trafficking in the theater of the absurd and produced something called “Adjusted EBITDA,” which added back to the actual EBITDA all sorts of theoretical one-time charges. Et voilà: Adjusted EBITDA of $551 million magically appears for the 12 months leading to March 2019, along with what the underwriters hoped would be a more acceptable adjusted EBITDA multiple of 21.7x. Alas, it was not to be. As investors gagged, and the market clearing price for Endeavor drifted lower and lower, Emanuel pulled the plug on it.
But as we all know by now—and what was recently confirmed in spades in a long Connie Bruck New Yorker profile—Ari Emanuel is nothing if not persistent. “The only way to get to success,” Emanuel told Bruck, “you realize you are going to fuck it up and you gotta just start going to work. There’s a boxing or UFC analogy: You gotta bite down on your mouthpiece and start fighting! You have to be willing to take the emotional damage. People get exhausted from that beating. I don’t know why I don’t.”
In late March, Emanuel tried again to hit the jackpot for himself and his investors, (although he and Whitesell had each taken out $165 million in cash in 2017). What a difference 18 months makes! This time the numbers were even worse than in 2019. The pandemic had not been kind to Endeavor’s businesses, as you might expect for a company dependent on movies being made, books being published (although that continued unabated), and people gathering to watch other people fight and ride bulls. According to the Endeavor prospectus, in 2020, revenue fell 24%, to $3.5 billion, driven by a 44% decline in “representation” revenue and a 20% decline in revenue from “events, experiences & rights.” (And if the revenue generated by a 2020 acquisition, On Location—a provider of “premium experiences” at sporting and musical events—is removed, Endeavor’s revenue for 2020 fell 30%, not 24%.)
And then there is the miracle of Adjusted EBITDA, 2021 edition. What had been an operating loss from continuing operations of $153 million in 2020 (and a net income loss of $625 million) was turned into—thanks to the alchemy of financial jujitsu—Adjusted EBITDA of—wait for it—$572 million, a swing of $725 million. Suddenly, with Adjusted EBITDA margins of 16.5%, Endeavor was starting to look like a real business.
So why not push the equity valuation beyond the $8 billion that wouldn’t fly in 2019 to more than $10 billion in 2021? And to get that done, why not replace Goldman Sachs as the lead underwriter with Morgan Stanley? Maybe a new lead underwriter could pull off what the old lead underwriter could not. The proposed $10.3 billion valuation represented an infinite multiple to the operating loss Endeavor experienced in 2020 and was still a hefty 17.5x the Adjusted EBITDA number. Then, when you add in another $5 billion in net debt, the proposed Endeavor enterprise value of $15 billion was a mere 26.2x 2020 Adjusted EBITDA. Surely, you might think to yourself, discerning investors could not possibly go for Endeavor II, with its higher valuation, debt levels, and Adjusted EBITDA multiples, when they puked on Endeavor I?
But you would be wrong, terribly wrong. Endeavor II was a boffo stock offering! The stock went public at $24 and has traded up to $32 a share—more than a 30% increase—valuing the Endeavor equity at about $14 billion and the enterprise, including post-IPO net debt of $3.9 billion, at roughly $18 billion. To say that this has been a bonanza for Emanuel and Whitesell would be an understatement. Those two men own stock valued now at roughly $1 billion—the prospectus does not make clear the ownership breakdown between the two men—in addition to the $165 million they each took out four years ago.
The other big winner in the IPO was Silver Lake Partners, the behemoth private-equity firm that owns about 40% of Endeavor and controls more than 68% of its voting rights. Silver Lake has been by Emanuel’s side since 2012, when it invested in William Morris Endeavor, the talent and literary agency. Silver Lake invested again when Emanuel bought IMG, the sports and media talent agency, in 2014. Silver Lake helped Emanuel buy UFC and helped him spin off Learfield IMG College, a college sports business. The value of Silver Lake’s investment in Endeavor is now around $4.8 billion.
And Silver Lake is not the only smart money Emanuel has attracted to his party. He added Elon Musk, currently the world’s third-richest person, to his board of directors. Bob Kraft, the owner of the New England Patriots, is an investor. KKR, the dean of the private-equity business, is an investor and took out $437 million in the IPO for its share of UFC that Endeavor gobbled up in conjunction with the IPO. Other investors include Dan Loeb and his hedge fund, Third Point; Paul Singer and his hedge fund, Elliott Management; and Mubadala, the Abu Dhabi sovereign wealth fund. (According to Bruck’s article, Emanuel returned to the Saudis the money they had invested in Endeavor, plus a sweetener, after the killing of journalist Jamal Khashoggi. “You have to have some morals,” he said. “And, to be candid—I mean, I’m not trying to toot my own horn—but, out of all the companies, and all the fuckin’ hoopla, we’re the only company that gave it back.)
I would have liked to ask Emanuel why his second try at the IPO succeeded when the company had been further wounded by the pandemic and by a larger debt balance. Why was this time different, I wondered? But it was not to be. His public relations representative, at Brunswick, informed me that the only time Emanuel could talk publicly about Endeavor was on April 29, the day the Endeavor stock started trading. He will next be available to speak publicly about the company after the expiration of the so-called 30-day quiet period—as mandated by the Securities and Exchange Commission. I had missed my window of opportunity. He did speak to CNBC, among other media outlets, from the floor of the New York Stock Exchange, where he rang the opening bell on the day of the IPO. He told CNBC that he “listened to Wall Street” after the failure of the first IPO and “re-segmented” the company, focused around owning 100% of UFC, which the IPO proceeds and a $1.7 billion private placement of equity along with the IPO made possible.
Emanuel said that Endeavor clicked with investors this time because “we’re kind of the reopening story…We’re a unique company in the marketplace right now and perfectly primed for where the reopening [of the economy] is going.” He said that UFC had just had a fight before a live audience in Houston and more live-audience fights were scheduled. He said he is also planning some UFC NFTs. And that a UFC video had been streamed more than 1 billion times in China. The CNBC reporter wondered whether Emanuel would be able to contain himself on earnings calls. Would he be using his usual colorful language? “I’m gonna be me,” he said. “I have grown up over the last 26 years running the company…I’ll be who I am, but everybody around me is making sure that I’m in line. It’s gonna be hard for them.”
There will be a market correction at some point. Of that I am certain. If Emanuel and his well-heeled investors don’t want to be caught in that inevitable downdraft, they would be wise to move beyond being simply a “reopening” story and instead become a debt-reduction story and a real—not adjusted—EBITDA story. If the Endeavor IPO has proved anything amid the insanity of the current financial marketplace, it’s this: Don’t bet against Ari Emanuel.
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