Endeavor IPO Is "Not for the Faint of Heart," Analyst Warns

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Wall Street observer Todd Juenger estimates the company will raise $900 million in its IPO and use it mostly to pay down debt, but even after doing so the firm's remaining net debt would exceed $3.1 billion.

The Endeavor initial public offering is "not for the faint of heart," in large measure due to the company's substantial debt, a Wall Street analyst warned on Tuesday.

Analyst Todd Juenger of Bernstein says that, in the best-case scenario, Endeavor — which owns agency WME as well as a majority of Ultimate Fighting Championship and more — will raise $900 million in its IPO and use it mostly to pay down debt, but even after doing so the firm's remaining net debt would exceed $3.1 billion, a lot for a company that reported $551 million in earnings before interest, taxes, depreciation and amortization in 2018.

"Most of the underlying earnings are both volatile and unpredictable," Juenger told his clients in his Tuesday research note. "There are also a number of existential risks, including reliance on bombastic UFC star personalities, the violence inherent in MMA combat, pressures on representation packaging and relationships with talent."

The latter, of course, refers to a feud between the top agencies and the WGA that has caused many writers to part ways with their agents. Endeavor didn't break out earnings for UFC, which it and others paid $4.1 billion for two years ago, but Juenger figures it brought in $650 million in revenue in 2018 and $240 million in EBITDA.

On the plus side, Juenger notes that "MMA is a growing sport with international appeal and an audience that skews young and male, a demographic that is very hard for brands to reach."

While Juenger calls UFC "Endeavor's most interesting brand," he worries that its popularity relies on only a handful of stars to generate pay-per-view interest.

"Conor McGregor is a great example," says Juenger. He delivered the second- and third-most-watched PPV events in U.S. sports history, "But one of his antics injured innocent bystanders in 2017 and another one led to his arrest on felony robbery charges."

On the talent agency side, he notes that packaging fees has delivered huge paydays for Endeavor and its competitors on shows like Seinfeld, Friends and The Big Bang Theory. "This revenue stream might be under pressure, but it's still very large, and writers don't see a dime of it," Juenger writes. "What they ultimately want is to increase their slice of the overall pie." 

Endeavor is a pioneer, but this could also work against its IPO. "There are no publicly traded peers that allow investors to understand how the businesses behave over time," Juenger writes.