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Endeavor Group Holdings: The World's Most Talented Company

MyWallSt Staff, The Motley Fool

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Endeavor Group Holdings (EGH) has many investors in hot anticipation of its expected fall IPO. Founded in 1898 as the William Morris Agency, the company has gone on to dominate the world of entertainment, sports, modeling and more from its Los Angeles base. 

In 2009, WMA merged with Endeavor Talent Agency, a boutique firm, and in the years that followed went on a shopping spree that included the purchase of sports and modeling agency IMG and the lucrative Ultimate Fighting Championship (UFC).

In addition to managing UFC champions such as Conor McGregor and Ronda Rousey, the company boasts to have represented more Oscar and Grammy winners than any other agency, more than 60% of major U.S. festival headliners, and seven of the top 10 best-paid models in the world. The company and its agents represent more than 6,000 clients, including major film and TV stars, writers, musicians, and athletes.

Man in boxing gear kicks a punching bag

Image source: Unsplash.

Beyond being a talent agency, the company is now a major producer of content for streaming and cable channels, distributing sports programming and selling media rights in over 160 countries to clients including the NFL and the International Olympic Committee. Added to this is its lucrative direct-to-consumer advertising segment, which represents brands such as Budweiser and Visa.

It seems as though Endeavor controls a significant chunk of the world's entertainment, but is it too much?

Going public...

At this point, you may be wondering: "After 121 years, why has Endeavor never gone public before?" Well, there are actually five reasons for this:

1. Profit

Despite all the power Endeavor seems to have, its financials are not as stable as one might think. According to its prospectus, it has $4.6 billion in debt, and its total liabilities amount to $7 billion, while net income for 2018 was just $231 million after reporting losses in the previous four years. Needless to say, the company doesn't sound like a risk-free investment, considering its size and influence.

2. Up-front costs

Similar to some of the issues experienced by Spotify, the risk factor involved with acquiring rights to content is quite high. In December 2018, the company committed to spending roughly $4 billion on media payments for events over five years. Any interruption to these events, such as weather forcing a concert cancellation, could have an adverse effect on the business. Bearing the brunt of the cost of any event is a risky endeavor in itself.

3. Disputes

Endeavor is actually locked in the midst of a major fees dispute with the Writers Guild of America, with the WGA advising its 15,000 members to fire their agents. "The outcome of the dispute, including the commercial landscape that will exist in the future between writers and agents, could have an adverse effect on our business," claimed EGH in its prospectus. A hit on its agency business would be a dangerous blow for the company.

4. Shareholder influence

Shareholders can expect to have little say in the company when it goes public, as there will be four classes of stock listed, with the most valuable ones being withheld for executives in the company only. With the company withholding the majority of the vote, shareholders with different opinions of the company's direction may have little to no chance to voice their opinions.

5. Diversity

The company has come into some scrutiny due to its lack of gender diversity at an executive level. With only one woman named in its current prospectus, there is still a long way to go for a company that promises to embrace diversity.

The outcome...

With EGH planning to go live in September at the earliest, there will indeed be concerns surrounding the company's current practices and debts. In an open letter to investors, CEO Ari Emanuel wrote: 

"As the entertainment industry moves toward a closed ecosystem model with less transparency, our clients and businesses need more insight, resources, and solutions than ever before."

There have been few IPOs in the past that ran a business format similar to EGH's. The company seems to just be dipping its hands in as many pots as it can before going public. One cannot help but draw similarities between EGH's business strategy and that of Disney, which in recent years purchased established and popular franchises such as Marvel and Lucasfilm, incorporating these subsidiaries into its own larger brand identity.

There may be several issues clouding the much-anticipated IPO, but how Endeavor proceeds in the months following its initial offering will lend some insight into how successful the business may be as a public entity.

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