Endeavor's Risky IPO: Game-Changer or "Anomaly"?
If CEO Ari Emanuel's gamble proves a Wall Street success, it may encourage more big-money giants to invest billions in Hollywood representation — or it could all blow up in his face.
Endeavor's recent filing for an initial public offering likely will be viewed as a watershed moment for Hollywood — no matter if it fails spectacularly or is perfectly timed.
The novelty (and lightning rod) of a publicly traded talent agency, Endeavor's WME, inevitably will send shock waves through a representation ecosystem that over the past decade already has seen an enormous influx of billions in outside private equity money. In the days since the May 23 filing, industry observers have obsessed over the savvy or folly of CEO Ari Emanuel's gamble.
Is Endeavor's odd amalgam of sexy assets enough to convince Wall Street to downplay $4.6 billion in debt? Is a volatile talent business (one currently under siege by the Writers Guild) something that can be projected on a quarterly basis? And when the dust settles, will Endeavor or its rivals survive, and in what form? "When IPOs work or don't work, the entire industry segment is painted by that, and Endeavor will inevitably impact the rest of the entertainment industry based on how well or how poorly it does," says Salem Partners managing director Keyvan Peymani. The upside if it succeeds is a demonstration "that agencies are viable companies that can attract outside investment," adds a partner at a rival agency.
"Similar deals often come in groups, just as Lyft was quickly followed by Uber. Regardless of how it's received, Endeavor's public offering will make it easier for other talent agencies to go public, take on outside investments and make acquisitions," says Matthew Kennedy of Renaissance Capital, a manager of IPO-focused exchange-traded funds. "Importantly, they'll have a direct public comp, so they'll be easier to value. And new private investors now have some assurance that an IPO/liquidity could easily be on the table."
Endeavor is in a so-called quiet period before its IPO, which could come as early as late June or July, but The Hollywood Reporter contacted several rival agency execs who spoke candidly about their changing business. Currently, only CAA, Endeavor and UTA have outside financial backers (ICM, the first agency to sell a significant stake to a private equity firm, bought out its owner and created a partnership in 2012). But if Endeavor's primary backer Silver Lake Partners, which has invested more than $1 billion in the company, turns a profit on the IPO, Hollywood's mid-tier agencies could become attractive targets for investment or for M&A activity. "I think you will see a lot of people kick tires. I absolutely expect to see some movement to figure out how to compete with a public Endeavor," Peymani says. "It's natural that people are going to take a really deep look at not only the Big Four but also all of the ones that might be potentials to consolidate together in some kind of roll-up. Endeavor is interesting because it has all these vertical pieces where synergy works, so from an investment standpoint I might say, 'If there is such a thing as a competitive advantage in the entertainment business, this might be it.' A stand-alone agency by itself? It's a harder proposition."
Among the agencies only CAA, owned by TPG Capital, has the size and diversification to even consider such a play, say experts, but it has not diversified into tangential businesses as Endeavor has. CAA hasn't made any public moves toward an IPO, and it isn't rushing to follow Endeavor to the New York Stock Exchange, says a source familiar with its strategy. "If the IPO is successful — Endeavor goes public at a share price it wants, and shares don't sink in the first few days — other private equity-backed agencies are likely to be attractive to other investors. However, there are advantages to a company to remaining privately held and choosing whether and when to go public on its own terms and timetable," says Center for Economic Policy Research analyst Eileen Appelbaum. On the other hand, Peymani notes that outside investors may be itching for activity. TPG, for instance, first invested in CAA back in 2010. “If I am one of the people in TPG or the private equity companies that are in UTA or the [other venture capital or private equity firms] that are sniffing around the industry, it just forces the question of, when do you get the return on that investment? You've gotta believe that questions are starting to get asked."
CAA, UTA and ICM all declined to discuss how the Endeavor IPO would impact their plans. (Few companies would concede that a competitor's bold move would significantly alter their own strategy.) “My guess is that whatever changes take place don't have much to do with the success or failure of WME as a public company. They'll be defined much more by market forces, media consolidation, pressure on pricing for talent," says a top agency exec, who believes the Endeavor IPO is "an anomaly as opposed to a guiding path for other agencies."
Few companies would concede that a competitor's bold move would significantly alter their own strategy. "My guess is that whatever changes take place don't have much to do with the success or failure of WME as a public company. They'll be defined much more by market forces, media consolidation, pressure on pricing for talent," says a top agency exec, who believes the Endeavor IPO is "an anomaly as opposed to a guiding path for other agencies."
And yet, in the week after Endeavor filed its S-1 with the SEC, a year-old rumor about UTA acquiring Paradigm once again began to circulate in Hollywood. Both agencies deny such a move is in the works, and an exec at another agency — who'd also heard the whispers — doubted that a rival going public would be the motivation. "That isn't going to make [UTA CEO] Jeremy Zimmer more or less interested in buying Paradigm," the exec says. "If his goal is to have a bigger, stronger, more diversified company, then he needs to do that anyway regardless of whether or not Endeavor is public."
Although Kennedy notes that in the age of consolidation, public companies can use their stock as currency when picking up acquisitions, Endeavor's competitors refute that going public gives the company an advantage in recruiting clients or employees. For now, each agency characterizes itself as remaining devoted to client representation, even as it accuses others of losing that focus. Endeavor in particular is no longer seen by rivals as an apples-to-apples competitor, but rather as an entity that has transmuted itself into a Frankenstein of a company. Even as CAA and UTA have launched affiliated production divisions wiip and Civic Center Media to take on Endeavor Content, no other agency has attempted to unite businesses as disparate as UFC, Miss Universe, Professional Bull Riders, IMG Academy and Frieze art fairs.
There's also the very real chance that the Endeavor IPO blows up in Emanuel's face, becoming a cautionary tale rather than a brave new business. Debt concerns have trailed the company since it began acquiring assets, and some question the synergy of such distinct businesses. Plus the current Writers Guild fight, which has caused dozens of top screenwriters and showrunners to fire WME, shows little sign of ending. Most Wall Street analysts have not covered the company yet, but one, research firm New Constructs, issued a "very unattractive" rating and called its reported earnings per share "misleading" and higher than New Constructs' own calculations. "If concerns about Endeavor's ability to attract and retain talent affect its IPO, other agencies may want those issues resolved before contemplating a similar move," Applebaum says.
Regardless of Endeavor's fate, agency insiders say diversification of businesses and client services, as well as M&A activity, is now the future. "You're just going to see fewer companies that are bigger, just as you're going to see more consolidation among the major media companies," says the agency partner. Peymani believes it will still be possible to maintain an old-school agency that focuses solely on talent representation and servicing clients, but that won't be a "venture returns business." The majority of agency leaders, he predicts, will be enticed by the ambition and "100x multiples" potential of becoming media moguls, setting up a classic existential choice for agencies in the future: "There's a crossroads, and [agencies and agents] will kind of be forced into choosing one of two paths."
Paul Bond contributed to this report.
A version of this story first appears in the June 5 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.