A Look at Endeavor Group's Valuable Assets and Business Strengths

In the following segment from an episode devoted to the upcoming Endeavor talent agency IPO, Industry Focus host Nick Sciple and Fool.com contributor Asit Sharma discuss some of Endeavor's valuable assets, as well as its strengths, which include a knack for value-enhancing mergers and acquisitions. While much of the episode focuses on Endeavor's risks and potential investing pitfalls, prospective investors should also understand its tangible business opportunities, as they speak to the company's future potential.

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This video was recorded on July 09, 2019.

Nick Sciple: Okay, Asit, on the back half of the show, I want to talk about some of the opportunities for Endeavor to grow and leverage their assets, as well as some of the risks facing the business today. In their S-1, Endeavor talks about one of their opportunities as increasing demand from audiences for content. We see more and more -- Netflix, Amazon, Disney+ -- there's just more and more demand for content from consumers every day. Endeavor's trying to position themselves to be able to deliver that both through their relationships with talent, their owned assets they're moving into, as well as the marketing and production services they offer to other entities.

When you look at all these assets that Endeavor has together, do you think these pieces fit together and add leverage? When you look at the S-1, the competitive advantages that Endeavor calls out, do you buy the case that they're making?

Asit Sharma: I'm tempted to because, as one of the world's largest, if not the largest, I believe they are the largest -- the reason I'm hedging here is, they've lost some of their writing talent, which we're going to talk about in a second here. But as the largest representer of talent, and also one of the largest conglomerates of content, and these subcategories that Nick has been talking about -- TV packaging fees, sponsorships, ticket sales, license fees, data-streaming fees, pay-per-view programming, etc. -- as one of these largest conglomerates, they have the fuel. There's no problem with this company increasing revenue. And they're very savvy at acquiring to add on not just more revenue, but more diverse revenue.

The question is, has the focus been so much on adding all these services that it's detracted from a really basic part of the financial equation, which is, once you add new revenue, you have to find operating leverage. You have to increase margin, cut costs so those profits start flowing to the bottom line. I believe that Endeavor has the pieces. But what investors are going to ask, institutional investors, when they view the road show, when this company goes on the road and pitches this IPO to pension funds, to big corporate investors, they're really going to dig into the question of whether the management team, Ari Emanuel and Mr. Whitesell, who we'll also talk briefly about, Patrick Whitesell, do these awesome talent and acquisition moguls have the type of clinical, operational acumen to now start making profit out of what's been a money-losing business for a number of years? That's why I can't seem to get sold on this equation.

I do want to flip it back to you, Nick, to talk about their acquisition expertise. I've got a small point to make about that. But the other side of this coin is, they're good at acquiring small companies, adding to their intellectual properties. Could that be the piece that makes them attractive as an investor? I'll ask you about their acquisitions.

Sciple: When you look at Ari Emanuel, he started Endeavor, the agency, the historical business that led to what it is today, in 1995. Really had a vision to shake up the management industry. And he's really done that. He's had a vision, and he's been talking about taking Endeavor public for a long period of time. His vision has clearly played out, and he's been very aggressive in doing so. There does appear to be some opportunity as Endeavor moves into content to leverage their relationships with clients to maybe do some vertical content creation for their clients, that can create new opportunities that didn't exist before, where you can see all these assets rhyming together to create more value than they would on their own. It's just to be determined to see how they will be integrated. I'd really like to continue to watch this company over several quarters. Even most of these acquisitions. The big moves into podcasts and sports betting are only a year or two old, so it's hard to see what the final product will be after the integration takes place.

What are your thoughts there? You said you had some additional thoughts there, on what's going on with M&A there.

Sharma: Yeah. Briefly, one thing they seem to have a talent with is increasing value. They've got a stable of private equity investors. They seem to have a talent for making an acquisition and then selling off parts and pieces after making the company more valuable. The example I want to use is Learfield IMG College, which as we said earlier deals with college sports licensing. Very valuable business. After forming this company through the merger of two other companies, Endeavor had a 49% stake in Learfield IMG College. It turned around and sold recently a 13% stake back to affiliates of Silver Lake Partners. That was a pretty lucrative deal for them. Out of that, they were able to book a nearly $700 million gain on their books, which made up for losses in 2019. So, there is a talent here for buying low, combining with other assets, selling not even the whole thing, but selling a slice of an entity at a higher price. There's some value there.

I also did want to mention that one of their goals is to pursue more strategic M&A. As Endeavor has grown, you could make an argument that since they got a rich investor in the form of Silver Lake in 2012, they've done a lot of acquisitions. Not all of them have been the most strategic in nature. It's more of what we've been talking about, building capabilities across this wide footprint. But the company says it's going to be pretty strategic forward. So, there's some opportunity there.

Sciple: The last thing I'll say there on management and M&A, if you're going to buy into this company, you need to believe in the vision of Ari Emanuel, who is the CEO of the company, as well as Patrick Whitesell, who's the chairman. They were co-CEOs or for a period of time leading up to this. Those two men, along with Silver Lake, will dominate voting control of the of this business. Pretty much any decision that's going to happen with the company moving forward, they're going to have the voting rights to decide that. So, you really have to believe in the vision of these folks moving forward, and be willing to give them a long leash because I think there's going to be some volatility.