Description

We believe that Endeavor Group Holdings (EDR) is likely to get brought out at a premium to the current stock price in the near term.  The shares represent a compelling risk-reward.  We will not go through a detailed review of all of EDR’s businesses in this note (refer to a sellside initiation report for that), but the three key assets for the purpose of valuing EDR in our view are (1) EDR’s 51% stake in TKO (which came together via the merger of EDR’s 100% owned UFC business and publicly traded WWE), (2) a large talent representation business (WME) that rivals CAA, the two of which dominate the global talent agency industry, and (3) a large events business known as Events, Experiences, & Rights (EE&R), which includes numerous assets such as On Location, the Madrid Open, and the Miami Open.

Below is the recent timeline regarding EDR’s strategic alternatives:

• On 10/25/23, EDR announced a review of strategic alternatives.  “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,” said Ariel Emanuel, CEO of EDR.
• Later that day, Silver Lake, the controlling shareholder of EDR, put out their own press release, stating: “Silver Lake is currently working toward making a proposal to take Endeavor private. 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. Silver Lake is the owner of approximately 71% of the voting power of Endeavor. Our Co-Chief Executive Officer, Egon Durban, and our Managing Director, Stephen Evans, serve as members of the Executive Committee of the Board of Directors of Endeavor. Silver Lake has been a committed investor since 2012 and has made significant investments in Endeavor since then to support its growth.”
• On 11/1/23, Bloomberg reported that Mubadala, the Abu Dhabi wealth fund, had entered discussions with Silver Lake to join the bidding group for EDR.
• On 12/6/23 with no deal yet announced, Puck, a well informed media group focused on Hollywood, reported the following: “I am told the deal is still likely to happen, even if it won’t be particularly lucrative for the investors who bought the Endeavor stock on the I.P.O. or after the stock ran up in October.”  https://puck.news/aris-deal-zuckers-next-steps/
• On 12/11/23, David Faber of CNBC reported that the potential sale was not close and would likely disappoint anyone hoping for a deal before year end.  He said it was possible Silver Lake would make its bid before the end of January 2024.  This report sent EDR’s share shares down from ~$24.60 to below $23.
• The share price sits at $23.04 today as of Friday's close.

The market’s logic is that Silver Lake will indeed make a bid to acquire the shares of EDR it does not own, and that this bid will come at only a modest premium to the $24 IPO price.  For instance, a bid of $26 would not be “particularly lucrative,” as Puck as has described Silver Lake’s pending bid relative to the IPO price of $24 (only an 8% premium for a company that has been public for 2.6 years).  We struggle to see how Silver Lake would be able to get a bid of $24-26 through the Special Committee of directors (led by Ursula Burns according to Puck), and think the most likely outcome will be around $28, which in our view would still be “stealing” the company compared to our estimate of fair value.  Assuming a deal is announced by 1/31/24, we think the deal should close within 3 months (assuming no meaningful anti-trust or CFIUS type filings, which we think are doubtful to be hang ups in this situation).    

While unlikely to make it through the fairness committee, an offer of $24 (closing 4/30/24) à 4% upside, or a 10% IRR.  We view this as the worst case “deal” scenario, but also the least probable.   A $24 deal price would only be a 6% premium to the 3 month average “unaffected price” prior to 10/11/23 of $22.62.  10/11/23 is the date in which Ari Emanuel gave what we’d characterize as a misleading interview to Bloomberg surrounding EDR’s bid to acquire the PGA: https://www.bloomberg.com/news/videos/2023-10-12/superagent-emanuel-confirms-endeavor-s-bid-for-pga-tour-video

In this interview, Lucas Shaw from Bloomberg repeatedly asked Ari to discuss his PGA bid, which was already reported in the press, and Ari described that he wanted to buy the PGA because EDR’s affiliate TKO is in the business of sports and he is “an avid golfer” (he is a 7 handicap, he brags).   Furthermore, he declined to discuss the nature of his bid, but said it was for a minority stake in the PGA.  In offline discussions with investors, EDR President Mark Shapiro had previously described EDR’s interest in the PGA in a much more shareholder friendly way.  Mark had said that EDR had offered to buy a stake in the PGA in exchange for the PGA itself granting EDR a cash flow accretive licensing deal. Mark had assured investors this would not be structured like EDR’s disastrous investment in Learfield, which was a business that EDR has now effectively written down to zero but had owned a minority stake in the business that was dilutive to earnings (via equity losses from affiliates). In our view, the way Ari publicly described his PGA bid was extremely negative to shareholder value. Namely, Ari represented that he was interested in doing the deal because he loved golf, not because it was accretive for shareholders, and the structure he was pursuing ran the risk of diluting the P&L. After the interview, EDR’s share price sold off to as low as $17.67 on 10/23/23, down 14% from the day before Ari’s Bloomberg interview.  The press release announcing strategic alternatives came shortly thereafter on 10/25/23, and caused the share price to rally back to the $23-24 range, effectively undoing the harm that Ari had just done to the stock.  As such, we believe it would be disingenuous for either Silver Lake or the Special Committee to look at the share price of EDR between 10/11/23 and 10/24/23 in determining the “unaffected” share price for EDR prior to takeover speculation.  We believe this dynamic was missed and not understood by Puck in their reporting regarding the EDR deal dynamics on 12/6/23.

The low end of what could potentially get through Special Committee as “fair” deal range in our view is $28 (66% IRR, 21% upside).  Our logic here is pretty simple and frankly dramatically understates the value of EDR.  We do believe Silver Lake will attempt to pay as little as possible for EDR and has no intention of paying minority shareholders fair value for their shares.  At $28, the implied market cap of EDR is $13bn and the TEV is nearly $17bn.  We back out EDR’s 51% stake in public traded TKO (at TKO’s current share price of $76) from EDR’s implied enterprise value (note that EDR consolidates TKO’s net debt so you must back this out of EDR’s net debt as well).  This results in a $7.2bn TEV for EDR ex TKO at the deal price of $28.

Per Bloomberg consensus, 2026E EBITDA for EDR is $2.36bn, or excluding TKO, implied EDR EBITDA is $717MM.  Note that we must value TKO on 2026 as a normalized year as this will include the step up in the UFC contract (media rights are currently with ESPN).  Per Visible Alpha consensus, 2024E Representation segment EBITDA is expected to be $511MM.  Note that this business, which is predominately the WME Talent Agency, is directly comparable to CAA (just sold to Artemis for $7bn, or 15x EBITDA in September 2023) and UTA (sold to EQT in July 2022 also at 15x EBITDA).  On 2024E, 15x on EDR representation segment would imply $7.6bn of value compared to the entire EDR enterprise value excluding TKO of just $7.2bn. So Silverlake would be getting the Events, Experiences, & Rights (EE&R) and Sports Data & Technology businesses, which in 2026 are expected to generate $263MM of EBITDA (net of all corporate expenses) for free.  Silver Lake could argue EDR Representation segment is not directly comparable given there is a small marketing business (160 over 90) and licensing business imbedded in the Representation segment.  Even at 12x 2024E EBITDA for Representation, Silverlake would be getting EE&R and Sports Data & Technology for only 4.3x 2026E EBITDA (or only 7.5x on 2024E. Note Sports Data & Tech segment will experience strong earnings growth beyond 2024 due to merger synergies between IMG Arena and OpenBet not fully reflected in 2024E numbers). 

Furthermore, we are not putting any premium whatsoever on the TKO business, which is the single biggest driver of value for the EDR equity narrative, and the reason we think most EDR shareholders own EDR in the first place. Without even assuming any future capital allocation for 2024 and 2025 (i.e. debt paydown, buybacks), TKO is currently trading at less than 10x 2026E EBITDA and at more than an 8% FCF yield.  Buying control of this business via EDR’s 51% stake should command a large premium to the current TKO share price in any sort of fair EDR sum-of-the-parts analysis, but we do not assume that here.

Looking beyond what Silver Lake will be willing to pay for EDR, we further think it is possible that Middle Eastern buyer may come in over the top and take out Silver Lake’s position. Silver Lake is an economic animal that has been involved in EDR since 2012 and, like the rest of the private equity industry, is likely under pressure to return capital to limited partners given a barren 2023 for LP return of capital.  If Silver Lake can exit at an attractive return to their own LPs, we think they will likely look to do so.  The Saudis have expressed strong interested in combat sports, spending more than $100MM to invest in the PFL this year: https://www.espn.com/mma/story/_/id/38291590/pfl-sells-minority-stake-plans-expansion-saudi-arabia

Furthermore, UFC, the largest combat sports league globally by a wide margin, itself has announced its first event in Saudi Arabia for March 2024: https://www.sportspromedia.com/news/ufc-saudi-arabia-fight-night-hosting-march-2024/

WWE, which has come together with UFC in the TKO merger this year (with EDR owning 51%), has been staging events in Saudi Arabia since 2014.  Finally, extravagant sports spending by the Saudis has not slowed down, with Jon Rahm accepting a staggering 500MM pound offer to join LIV Golf tour on 12/7/23: https://www.insidethegames.biz/articles/1142870/jon-rahm-will-sign-with-liv-golf

Thus, given the strategic fit in Saudi Arabia’s expanding sports portfolio, we would not be surprised to see an over the top offer that Silver Lake finds acceptable.  We imagine such a deal would need to occur anywhere between $32 to $45 per share ($32 à 137% IRR, 38% upside).

Finally, if the deal breaks all together, which we see as very low likelihood given that Silver Lake controls the whole process and the sponsor may take a reputational hit for walking away, then it is possible the stock could temporarily trade down to $20 or lower.  We would view this as an attractive buying opportunity.  A fair sum-of-the-parts analysis on EDR results in a share price of high $30s to mid $40s per share. Note that investors should not put a Holdco discount on EDR’s TKO stake because EDR can spin TKO on a tax-free basis in a few years.  Furthermore, EDR is controlled by Silver Lake, an economic animal. So if for whatever reason the sponsor cannot acquire minority shareholders’ shares and the deal actually does die, we would expect Silver Lake to pursue shareholder friendly policies over time to unlock shareholder value, such as spinning TKO.

Catalyst

An announced transaction by early next year.