His conclusion: Investing in the company “is not for the faint of heart,” and the mega-agency’s pitched battle with the Writers Guild is just one of the reasons why.
The research note Juenger issued to clients Tuesday did not include a specific recommendation as to the stock, given that the offering has not yet been priced or the date specified. Instead, the document lays out his view of the business after a detailed pass through the S1 it filed in May with the SEC.
On the plus side, Juenger notes, Endeavor owns 51% of the UFC, which is far and away the leading MMA circuit and the beneficiary of lucrative new TV and streaming deals with ESPN. “The opportunity to own a stake in a dominant league in a growing sport with global potential doesn’t come along every day,” he writes.
In addition to buying into sports, public market investors will be able to bet on “rising demand for talent driven by the increasing investment in original scripted TV content,” Juenger adds. As to the feud with the WGA over Endeavor’s producing activity and conflicts of interests that can pose, Juenger says radical changes to conventional business models have forced agencies to explore alternatives. “Most industry observers agree that the idea of returning to the simpler days of pure commission is unrealistic,” the analyst writes. “Talent agencies haven’t worked that way for decades. They believe the WGA is using this as a negotiating tactic, and what they ultimately want is to increase their slice of the overall pie.” While packaging revenue — which writers are not specifically challenging — is “under pressure” as streaming giants pre-empt back-end deals, Juenger points out that it is “still very large.”
One major financial issue with Endeavor, in Juenger’s view: “an extraordinarily high amount of debt,” reaching 9.5 times EBITDA if equity compensation is counted as an expense. Proceeds from the IPO, which he said in a bullish case could hit $900 million, will be “wholly used to reduce net debt.” Even so, the company will likely carry a “substantial debt load” and has a “questionable ability to de-lever organically.”
The upside of the leverage scenario could be share price. “Current investors must surely be uncomfortable operating a volatile business under such a large debt load,” Juenger writes. “So we think Endeavor is motivated to go public and raise equity to reduce this indebtedness, which could translate into a more favorable offering price for equity investors.”
Operationally, Juenger writes, “most of the underlying earnings are both volatile and unpredictable.” In the first quarter, according to the May filing, adjusted earnings dropped 10% from the comparable period in 2018. Risk factors abound, including the violence and “bombast” of UFC talent, possible brain drain (founder Ari Emanuel, Juenger notes, himself abandoned ICM in 1995 to launch Endeavor).