Endeavor’s IPO Could Fall Flat: What Does that Mean for the UFC?

By Patrick Auger Sep 19, 2019
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After delaying its original plans due to the $700 million acquisition of On Location Experiences, Endeavor looks set to finally stage its IPO this coming fall. The entertainment conglomerate disclosed on Sept. 15 that it plans to offer around 19.4 million shares at a price ranging between $30-32 per share. An additional 2.9 million shares will be available to underwriters of the IPO, which include Goldman Sachs and JP Morgan among other firms. The offering could generate as much as $700 million for Endeavor, with the majority being put toward paying down the company’s massive debt and the rest being used for operating expenses and future acquisitions.

Despite fans, pundits, and Irish fighters who have called to own a piece of pie finally getting their chance to buy shares in the Ultimate Fighting Championship’s parent company, the stock structure of the IPO will keep control of Endeavor firmly in the hands of its current owners. Company CEO Ari Emmanuel and Chairman Patrick Whitesell will each own 18.7 percent of the firm following the public offering and will hold Class Y shares, which come with 20 votes per share as opposed to one vote per share that the Class A shares the public will be able to purchase. Endeavor’s longtime associate Silver Lake Partners and its affiliates will also hold Class Y shares, keeping governance more or less the same as it is currently.

While that may be comforting to some investors given the rise of Endeavor under its current leadership, not everything is sunshine and rainbows. The firm is carrying an enormous amount of debt – 9.5 times EBITDA if one includes equity compensation as an expense, with total liabilities reaching $7.2 billion based on filings in August. Coupled with unpredictable earnings from many of Endeavor’s businesses, veteran analyst Todd Juenger from AB Bernstein may have said it best in a memo to clients earlier this year in which he stated Endeavor’s IPO is “not for the faint of heart.”

A big positive that Juenger highlighted in his analysis of Endeavor’s offering, however, was the UFC. Although the talent firm only owns 51 percent of the premiere MMA promotion, new deals with ESPN and expansion into growing markets have significantly increased guaranteed revenue for the UFC and its parent company, as well as grown brand recognition for the UFC in emerging regions. With the MMA organization’s internal projections predicting revenue of nearly $1 billion for 2019, Endeavor will be shining the spotlight on the UFC as one of the most important brands under their umbrella.

Which raises an interesting question: What happens to the UFC if Endeavor’s IPO disappoints?

In this market, it certainly wouldn’t be an anomalous occurrence. Ride-sharing companies Uber and Lyft are down 18 percent and 39 percent respectively from IPOs they launched earlier this year, cloud-based team collaboration tool Slack is down 28 percent since its June 20 listing and on Sept. 16 WeWork’s parent company The We Company announced that it was delaying its IPO as its valuation continues to tumble. Many on Wall Street believe that this has signaled a diminished tolerance for risk and that the days of investing in Unicorn IPOs may be coming to an end.

Should Endeavor suffer the same fate as those listed above, what would that mean for the talent agency behemoth and its massive debt? What would that mean for the companies under its wing, including the UFC?

The answer will depend on how badly Endeavor’s offering performs. A slight dip or flat offering isn’t out of the ordinary, even with the largest of companies, so most likely in that scenario it would be business as usual. If the price dropped heavily over the months following the IPO, however, Endeavor would look to ease investor concerns by reducing debt and boosting revenue in any way possible and would expect its subsidiaries to do the same.

Although the UFC has made several steps in the past year to reduce costs and increase guaranteed revenue, a dismal Endeavor IPO would most likely lead to the promotion tightening the reins even more. Underwhelming fighters could be on a much shorter leash when it came to poor performances, and fan-favorite matchups like Nate Diaz vs. Jorge Masvidal may have to prove their drawing power before the UFC would consider making them headliners. Endeavor would be looking to its strongest assets to keep up their performance while it righted the ship, which would mean that the UFC, being one of Endeavor’s crown jewels, would have to reduce risk anywhere and everywhere, including the concerns around fighter pay.

With Endeavor battling it out with the Writer’s Guild of America and their aforementioned debt, a poor IPO could lead to a lot of things. With how successful the UFC has been up to this point, it is unlikely that the entertainment group would want to make too many changes unless forced to, and even then they would want to have UFC executives on board given their need of steady revenue from the promotion. If the IPO is a hit, that may give the UFC more leeway to experiment with other non-title headliners and deepen some of the promotion’s thinner divisions by more aggressively going after talent. Whatever the case may be, one can expect Endeavor’s IPO to have some effect on the UFC. Whether that effect is minor or quite major, however, remains to be seen. Advertisement

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