Variety; Going Private: What’s Next for Ari Emanuel, TKO, WME and Other Assets as Silver Lake Makes Its Move

Story from Variety:

After two and a half years as a public entity, Endeavor is on the verge of going private again.

While nothing has been finalized, most observers agree that privatization is the most likely endgame following Endeavor Group’s announcement that it’s evaluating “strategic alternatives” for its assets, which include the WME talent agency and various live events businesses.

“By announcing that Endeavor was exploring its strategic alternatives, Ari was throwing in the towel,” says Lloyd Greif, an investment banker and CEO of Los Angeles-based firm Greif & Co. “From all appearances, Ari’s un-ringing the bell at the New York Stock Exchange and dropping the curtain — for now — as a public company.”

It might be humbling but not exactly a shocking development for Endeavor, which has struggled to convince Wall Street that its holdings can translate into shareholder value greater than the sum of its parts.

“Given the continued dislocation between Endeavor’s public market value and the intrinsic value of Endeavor’s underlying assets, we believe an evaluation of strategic alternatives is a prudent approach to ensure we are maximizing value for our shareholders,” Emanuel said in announcing the formal review.

Indeed, after the company finally went public in 2021 (following an aborted attempt two years earlier), Endeavor’s market capitalization slid from $10.6 billion to under $7 billion by the end of 2022. Its market cap (based on Class A shares) currently sits around $7.4 billion — bolstered by its stock popping in the wake of the strategic review announcement — while its total value is estimated to be north of $11 billion when the preferred shares held by Emanuel and key holdings of company insiders are included.

“Public markets these days always put a discount on holding companies or conglomerates,” says USC Adjunct Professor and former investment banker Sanjay Sharma, adding that Endeavor’s value “might be as much as twice the opening market cap — if they execute on it.”

What’s ironic is Endeavor’s key financial metrics are sound. The company has worked to pay down its debt load (it’s carrying around $5 billion in long-term debt, versus $5.7 billion just before its IPO), is profitable and has a healthy cash flow. Revenues were up 9% year-over-year for 2023, as of Q3. Meanwhile, Whitesell and Emanuel have managed to squeeze value out of some individual assets, selling off the sports education institution IMG Academy for $1.25 billion earlier this year, for instance.

How the re-privitatization push will be accomplished is not yet clear, but private-equity giant Silver Lake — which owns about 71% of the voting share of Endeavor and whose executives hold two seats on its board of directors — is working on a proposal to acquire the rest of the company, having declared their intent to do so mere hours after Endeavor announced its strategic review. Most Wall Street analysts believe a deal will soon follow, given Silver Lake’s hold on the company.

“It seems highly unlikely that [there] would be any other conclusion to Endeavor’s strategic review other than a potential Silver Lake take-private process,” Evercore analysts wrote in a research note following the announcement.

Adds Greif, “Silver Lake is in a position to put them in a bear hug. Simply by putting out that announcement immediately, that’s a clear signal that Silver Lake pretty much took down the ‘for sale’ sign Ari put up.”

Whatever the company’s ultimate fate, it’s undoubtedly clear that Endeavor needs to reassess its strategy following two-plus years of treading water on the market, after Emanuel struggled mightily to take the company public in the first place.

Endeavor leadership first planned an initial public offering in 2019, only to reverse course mere hours before the scheduled launch amid lower-than-expected market demand. The IPO ultimately took place in April 2021, and Endeavor stock hit a high of $35 that December — then plunged amid the broader media market crash the next spring. Shares have yet to close above $30 again.

Emanuel has made no secret of his frustration with Endeavor’s lot. The CEO recently lashed out at his longtime rivals at Creative Artists Agency, which in September sold to French billionaire Francois-Henri Pinault in a deal valuing the talent agency at $7 billion, a multiple of 13 times the agency’s 2022 EBITDA, according to the Financial Times.

“We’re worth a lot more and we have more morals and we have a better business,” Emanuel declared at the Bloomberg Screentime conference last month, adding, “I actually don’t expect [Endeavor’s value] to be 15 times [EBITDA], because that’s the private market. [But] it shouldn’t be one and a half times. Give me six. I got kids to feed. I just don’t understand it.”

Greif, for one, understands the frustration. “The guy is fit to be tied. He’s built an entity that the Street doesn’t understand, doesn’t appreciate and undervalues [because] it’s a conglomeration of assets that don’t necessarily fit together,” Greif says.

Since the former Endeavor Talent Agency merged with William Morris to create WME in 2009, Emanuel and Endeavor executive chairman Patrick Whitesell have orchestrated numerous deals to diversify the company. Leadership has often asserted that the so-called “Endeavor Flywheel” can somehow create synergies between such disparate entities as WME, the Frieze Art Fair and the Professional Bull Riders organization — an unproven proposition in the eyes of investors.

“The valuation disconnect between Endeavor’s asset portfolio and its share price has been a constant since the 2021 IPO,” the Evercore analysts noted.

Even Endeavor’s attempt this year to boost value through the launch of TKO Group Holdings, a new public company created by merging World Wrestling Entertainment with the Endeavor-owned Ultimate Fighting Championship, has so far failed to lift to shares. TKO’s stock is down 24% since opening in September, and Endeavor shares only sunk further in the wake of the launch.

It's hard to escape the feeling that Endeavor was ill-conceived as a public company. Investment bank TD Cowen valued Endeavor’s assets at over $17 billion as component parts, versus the market’s $11 billion enterprise value on the company as a whole.

The big question, then, is what happens to Endeavor’s holdings under Silver Lake. The private equity firm may not be a seller, at least for the moment: “Silver Lake firmly believes in Endeavor’s business and is not interested in selling its shares in Endeavor to a third-party nor in entertaining bids for assets that are a part of Endeavor,” the firm said last month.

But upon acquiring Endeavor — which will take time to execute — Silver Lake may well evaluate which parts of the company can be sold off, both to help finance the deal and to realize the assets’ true value, Sharma, the USC professor, says.

“Silver Lake is not a company that’s going to say, ‘I’ll call you in five years.’ They’re going to say, ‘If we’re going to borrow to pay for this, what can we monetize right away to pay off our debt?’” he explains.

And ultimately, Greif says, Silver Lake will likely hold the cards when it comes to determining Endeavor’s future.