It should surprise no one that Endeavor resorted Wednesday to laying off, furloughing or giving pay cuts to a third of the company. Hot on the heels of a credit downgrade from S&P Global, this is its second round of COVID-19 layoffs since the pandemic struck in March, and the failed IPO in 2019.
Though co-CEO Ari Emanuel has tried to transform what was once just a talent agency into a more diversified behemoth, it is becoming more and more evident by how hard the pandemic period is hitting his company that slashing the payroll isn’t going to be the extent of what he needs to do to get him out of his predicament.
Having made 22 acquisitions over the past seven years, it feels inevitable Emanuel’s next move is going to be making select divestments. At the very least, stop him before he makes another purchase: Emanuel did, after all, spend $660 million in January—literally three weeks before the first Covid-19 case in America—on a majority stake in another live events and hospitality company.
In the boom times, this was fine, money was still coming in even if it was mainly servicing their debt (the main reason for the IPO in the first place was to escape the debt hole the company had found itself in and see revenues go toward profits instead).
But the boom times are no more. The TV and movie industry shutdown due to coronavirus has impacted all companies who have an interest in the deal pipeline moving, Endeavor included. But it has exposed Endeavor as being woefully prepared for an economic downturn, and much like the big banks of 2008, as being over-leveraged.
CAA, ICM and UTA haven’t seen their credit downgraded by S&P, or announced several rounds of layoffs since COVID-19 struck (CAA and UTA did announce pay cuts in an effort to avoid layoffs). Then again, the other agencies haven’t pursued an agenda of reckless expansion by purchasing a random assortment of fight leagues, beauty pageants, rodeos and hospitality companies.
The credit downgrade, from B to CCC+, meant the market now considered Endeavor to be unable to meet its financial obligations given the new adverse economic conditions. The company is $4.6 billion in debt, but at least investors such as Silver Lake Partners—which is reportedly placated by the latest cost-cutting moves—are there as a safety net.
But there are only so many staff cuts that can be made. If the pandemic continues, the pressure will grow for Emanuel to begin to sell off some of the acquired assets. With the market depressed, it is likely that these won’t be at the price paid for them. There are few alternatives for the company.
Many of the acquisitions over the years are not worth the price Endeavor paid for them, given they range across industries shut down by the virus. The one that could possibly return Endeavor’s investment is UFC, one of the only businesses that may still be able to operate and generate revenue.
But given the likelihood parting with UFC is too bitter a pill to swallow, there are alternative options for Emanuel to explore. The acquisitions over the years could be grouped into three broad categories, and selecting some of these to sell-off could ease the debt pressure for the duration of the pandemic:
1. Specialist agencies such as literary agency RWSG, fashion stylist agency The Wall Group, or eSports agency Global eSports Management.
2. Live events. Endeavor has collected a motley crew of live entertainment options other than UFC, chiefly art fairs specialist Frieze, Exhibitions International, MADE Fashion Week, Miss Universe Organization, and Professional Bull Riders.
3. Experiences and hospitality. Endeavor has been branching out into the hospitality arena, buying stakes in or purchasing outright companies such as On Location Experience or Top Shelf, who offer premium event experiences, or agencies in the space, including Clifford French and Fusion Marketing.
It’s entirely possible divesting some of this was in the cards for Endeavor long before the pandemic reared its head. Emanuel has sold previous pieces of the business after collecting profits, including selling Droga5 last year.
It’s likely that partners such as Silver Lake will not be happy with any part of their empire being dismantled. But Emanuel brought this on himself. While planning for an industry-crushing pandemic is typically outside the remit of the boardroom, overexposing the core company is not.