A tangled mess of immense potential value.
That is probably the most apt way to describe the corporate entity CEO Ari Emanuel brought to the public markets back in April of this year.
Endeavor, the former talent agency turned sports and entertainment conglomerate, posted earnings earlier this month. The results were strong, beating Wall Street expectations while at the same time raising guidance for the full year. Here are some of the highlights:
- $1.4 billion in third-quarter revenue
- $63.6 million in net income
- Third-quarter revenue for owned sports properties fell by $10.6 million year-over-year to $288.5 million
- Events, experiences, and rights segment jumped $62.1 million to $446.3 million
- Full-year revenue guidance was increased to between $4.89 and $4.95 billion
While the financial performance was laudable, dissecting the various business segments and revenue streams can be like untangling a set of wired headphones. Once separated, there does appear to be a method to the madness.
Endeavor indexes heavily on the events and entertainment spectrum, with only a few of its business lines falling outside of that purview. The company’s main three business lines — owned sports properties, events, experiences and rights, and representation — were all EBITDA positive during the period, beating estimates from both a revenue and EBITDA standpoint.
Society emerging from the pandemic with a heightened appetite for premium content and live events had a disproportionate impact on the company’s ability to remain profitable.
In the company’s April prospective, Emanuel emphasized this, saying, “The events of 2020 reminded us of the enduring value of premium intellectual property and content, while reinforcing the strength of our position within the sports and entertainment ecosystem.”
UFC Is Taking Off
The UFC is driving a majority of Endeavor’s growth in the owned sports properties division.
The division posted $288.5 million in Q3 revenues, down approximately 3% from the same period in 2020. The decrease in revenues stem, in large part, from the UFC pushing many of their early year events into the second half of the year and a one-time contract termination fee of $25 million. But for the nine-month period ended in September, the owned-sports-property division recorded its highest revenue… ever.
The UFC, in particular, has been busy building out consumer products, entering the NFT market, and continuing its string of successful international pay-per-views.
- In August, the UFC launched an NFT project alongside Crypto.com.
- In July, Crypto.com signed a 10-year $175 million kit deal with the UFC.
- In March, the UFC inked a five-year, $350 million deal to make DraftKings its official sportsbook.
- The promotion had six consecutive PPV event sellouts from April through September.
The UFC has been a juggernaut and that doesn’t look to change any time soon.
Scripted Content No More
Interestingly enough, it was actually Endeavor’s representation division that stole the show in the latest report.
The division was up 86% YoY for the nine-month period ended September 30 and up more than 100% from Q2 of 2021. The reason for this seemingly explosive growth? Delivered content.
The company recorded $384 million worth of delivered content during the period as Endeavor introduced shows, most popular of which was “Nine Perfect Strangers.”
While the growth is impressive, it should not be considered in the same manner going forward. Just nine days ago, Endeavor agreed to sell 80% of its scripted film and content business to Korea’s CJ ENM for $775 million.
The deal was part of a settlement with the Writers Guild stating that agencies, such as Endeavor, owning their own production companies and representing clients in those productions was a clear conflict of interest. In the agreement, Endeavor will maintain 20% ownership in the scripted content business while also retaining the non-scripted portion of the business and certain documentary and film sales and financing consulting.
Emanuel has been publicly bullish on the consolidation of media companies such as Amazon acquiring MGM and WarnerMedia and Discovery joining forces. The consolidation bears out his thesis that premium content and IP are now being placed at an even higher premium than they had been previously. Content studios have garnered significant attention from financial sponsors in 2021 alone.
- Lebron James’ SpringHill raised money from RedBird Capital, Epic Games, and Nike at a $725 million valuation.
- Reese Witherspoon’s Hello Sunshine sold for $900 million to a media company backed by Blackstone.
- Will Smith’s Westbrook Studios has reportedly engaged in acquisition talks with the same Blackstone firm that bought Hello Sunshine.
However, while the content did show the highest growth of all verticals, it is owned sports properties that Endeavor truly sees as the IP treasure trove.
Linear and digital platforms are vying for sports assets. Amazon has emerged as the frontrunner to buy a minority stake in the NFL’s media properties while also bidding specifically for the Sunday Ticket package. NBC retained the rights to the Premier League for $2.7 billion over six years — more than double the value of the previous six-year, $1.1 billion deal.
Endeavor now has the opportunity to lean fully into the category it is most bullish about.
“Remodeling”
What if Endeavor became the Berkshire Hathaway of sports leagues?
On the surface, this may seem strange but the model is already in place. Given the nature of Endeavor’s current HoldCo structure, which allows for ownership of individual subsidiaries, the company could begin to build out a portfolio of up-and-coming sports properties.
When Endeavor bought into the UFC for majority control in 2016, the $4 billion price tag was an investment in the potential that the MMA would become mainstream, an investment that has come to fruition. Potential targets for the same type of investment:
- Professional Lacrosse League
- The Indian Premier League
- Professional Pickleball Association
- National Rugby League (Australia)
Bottom Line
The PLL in particular is an attractive asset which has recently demonstrated growth amidst the pandemic. According to commissioner Paul Rabil, the league saw a 42% increase in ticket revenues YoY.
With the UFC as the centerpiece, Endeavor could surround it with fast-growing properties which could “draft” off the HoldCo’s existing operational competencies.
Growth and value appreciation take time, but if Endeavor can hit another home run like it did with the UFC, it might be worth the wait.
