I’d like you to briefly cast your mind, if you can, back to 2004. A foul-mouthed, high-flying and fictional Hollywood agent Ari Gold has just made his debut in HBO’s Entourage.
Ari Gold is good at his job. He’s also a bit of an ass who spits out lines such as this: "Nobody’s happy in this town except for the losers. Look at me: I’m miserable. That’s why I’m rich."
Interestingly, Ari Gold is inspired by a real-life agent: Ari Emanuel.
Ari Emanuel is the CEO of Endeavor Group Holdings, Inc., a “global entertainment, sports and content company” and the parent company of William Morris Endeavor (WME).
If you haven’t heard of it, you’ve probably heard of its clients.
WME has represented films such as Arrival and La La Land and clients such as Lin-Manuel Miranda, the creator and star of Broadway’s Hamilton. The company also has controlling stakes in mixed martial arts outfit UFC and the Miami Open tennis tournament.
Oh, and it acquired the Miss Universe Organization from one Donald J. Trump in 2015.
A few weeks ago, Endeavor — with Ari Emanuel at the helm — released its IPO prospectus. The company, which generated US$3.6 billion in revenue in 2018, is going public!
Now, while Emanuel would want you to channel your best Jerry Maguire right now and fist-pump the air while hollering “show me the money,” well…
Insert the very Hollywood sound of a car screeching to a halt.
For all its accolades, Endeavor is actually in a bit of a financial pickle.
For starters, it’s highly leveraged: according to its prospectus, as of the end of March, it has more than US$4.5 billion of long-term debt, total liabilities of around US$7 billion and just shy of US$500 million in cash and cash equivalents. Many of the companies it acquired over the last few years required Endeavor to tap into private equity i.e. other people’s money.
You could assume that’s why the company is going public to begin with.
The prospectus says proceeds from the IPO will be used for “working capital and general corporate purposes” and may also be used to pay down debt.
To boot, Endeavor is losing money faster than Eddy in Lock, Stock and Two Smoking Barrels. Okay, that might be a slight exaggeration, but the company did lose US$107 million in operating income in 2018, which is almost twice as much as it lost in 2017.
So, Endeavor decided to rewrite the script a little with what’s known as “Adjusted EBITDA.”
EBITDA — which stands for earnings before interest, tax, depreciation and amortisation — is a way of measuring a company’s operating performance.
Adjusted EBITDA involves removing various one-time, irregular and/or non-recurring items from EBITDA, generally with the purpose of painting a rosier picture.
Endeavor's Adjusted EBITDA is US$551 million.
This might be the point where Wall Street meets Hollywood. By using Adjusted EBITDA, the Endeavor prospectus uses special effects and lighting to put its best foot forward. Adjusted EBITDA is a non-GAAP (Generally Accepted Accounting Principles) financial measure.
Financials aside, the company is one of the big players in an ongoing dispute between the Association of Talent Agents and the Writers Guild of America. This has led to several writers severing ties — even if temporarily — with their agents.
And then there’s the actual product at hand. The company is positioning itself as a content platform — not unlike Netflix, Amazon, and more recently, Disney.
As Emanuel says in the one-page letter at the beginning of the filing, “Content is no longer defined solely by the traditional categories on which our businesses were founded. Television, movies, and live events have been joined by others including podcasts, experiences, social media, multiplayer video games, and e-sports.”
To wit: Endeavor is not just a talent agency. They promise.
The date for Endeavor’s IPO hasn’t been set yet, but one thing is certain: it won’t be the first time this year that a company has gone public with what we think are some pie-in-the-sky promises.
We’ve seen Lyft and Uber float despite an unproven business model — and stock prices after their respective IPOs were, shall we say, underwhelming. But we’ve also seen Beyond Meat’s share price explode, despite the fact it’s not a profitable company and may not be for a while.
It is, however, the first time in years a talent agency was publicly traded. So, the jury is out on whether Endeavor makes sense as a public company.
For us here at Spaceship, we’ll be watching Endeavor’s first act closely. We believe it’s hard to balance the best interests of celebrities and talent with maximising returns for shareholders.
Essentially, Endeavor’s assets are celebrities.
While Endeavor may be “diversified” in that it has a lineup of talent in various areas, it isn’t necessarily the most stable investment.
Additionally, we continue to worry about Hollywood generally.
Companies such as YouTube and Netflix produce and release content at lightning speed, and celebrities aren’t necessarily an important part of the strategy. This might explain why Endeavor has diversified into sport; keeping up with these companies is hard!
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager has considered investing for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s potential investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
