Why Endeavor's IPO Numbers May Not Add Up (Guest Column)
A USC professor analyzes the SEC filing and concludes the showbiz powerhouse, heavily burdened by debt, has an uneven profit history and an even shakier future.
For decades, Hollywood's major talent agencies controlled the machinery that funneled valuable human resources into hungry studios. But they craved more money, more power. With an infusion of private equity funding in the past 10 years, these agencies aggressively expanded beyond talent representation and packaging by buying entertainment enterprises and venturing into content development to reap the benefits of ownership.
There is not a better reflection of this than Endeavor, a company run by CEO Ari Emanuel that includes WME, IMG, Ultimate Fighting Championship, Professional Bull Riders and The Miss Universe Organization — much of which was financed via the craving-for-profit private equity firm Silver Lake Partners.
But in their quest for ever-increasing money and power, talent companies like Endeavor may have sowed the seeds of diminished influence.
It began with the Writers Guild of America, which felt betrayed by talent agencies driven more by studio packaging fees than their clients' careers and income. The WGA is proving to be a formidable foe. It requested that all writers fire their agents. More than 7,000 did, and many discovered that projects still came via fellow writers or the studios. The WGA even sued the four biggest agencies, namely WME, CAA, UTA and ICM Partners. The guild is drawing back the curtain to reveal that the power wielded by agencies is mostly smoke and mirrors.
Filing to go public yielded another peek behind the curtain, and it's not a pretty picture. Endeavor is burdened by debt and has an uneven profit history and an even shakier future. Long-term debt stands at $4.6 billion, and total liabilities are $7 billion. While revenue increased over the years to $3.6 billion in 2018, much was due to acquisitions. Expenses against that revenue are daunting, leaving net losses of $98 million in 2016 and $173 million in 2017. While a net profit of $231 million was achieved in 2018, much of that appears to be thanks to the sale of significant assets, which may have been an attempt by Endeavor to appear more successful than it is.
Things aren't getting better. The first quarter of 2019 reveals a net loss of $152.6 million, compared with a net loss of $146.8 million a year earlier. Even using Endeavor's rosiest profit metric (adjusted EBITDA), the margin dropped from 17.1 percent in 2017 to 15.3 percent in 2018. The first quarter of 2019 pegs it at 8.3 percent, which appears to be because of an investment spend. Net cash from continuing operations dropped from $216 million in 2017 to $121 million in 2018.
Endeavor could be rocked further if the WGA reaps financial concessions from talent agencies by getting a fat slice of packaging fees, assuming writers will eventually negotiate (which they have refused to do so far). This may be exacerbated if other talent from directors to actors follow suit by firing their agents or asking for a slice of the packaging pie. And worse, mega conglomerates, sparked by Netflix, have begun a high-priced bidding war for talent that can increase Endeavor's development costs. Even if Endeavor has a successful IPO and raises a small fortune, its debt, rising costs and uneven prospects do not bode well in an industry that is tumultuous.
This begs several questions. Why would Endeavor go public and expose its inner machinery? Why would it move from a solid talent agency orientation into the broader entertainment world? Why now? One must wonder if Endeavor believes that the future looks even tougher, so best to strike soon while casting the rosiest picture possible. It also can't go unnoticed that the biggest winners in a public offering are likely to be the agents at the top, even though the corporate prospects might not be as rosy.
Endeavor may well become a cautionary tale. In the sunnier days of the consistent 10 percent commission, the company was able to create a secure, well-crafted illusion of influence. No one was able to look behind the curtain. But we now know the truth; the power was mostly an illusion, and the drive for more may result in less.
Gene Del Vecchio is the author of Creating Blockbusters and an adjunct professor at the USC Marshall School of Business.
This story first appeared in the June 19 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.