Endeavor Pulls out of IPO: How the Plan Failed

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Super-agent and Co-CEO of Endeavor, Ari Emmanuel, was bucked off the Wall Street bull on Thursday when he decided to withdraw his company’s initial public offering just hours before it was to begin trading.

Last week, the company planned to sell an estimated 19 million shares, priced at $30 to $32 each. However, the investor demand turned out to be weaker than anticipated, and the expected share value dropped to $26 to $27 the day before trading was to start.

Ari Emmanuel, Co-CEO of Endeavor Holdings Group.
Credit: Photo by Stewart Cook/Variety/Shutterstock (9071719y) Ari Emanuel 48th Anniversary Gala Vanguard Awards, Show, Los Angeles, USA – 23 Sep 2017

Emmanuel grew Endeavor from the bottom-up when he left ICM Partners to create his own talent agency, also titled Endeavor. In 2009, the company merged with the William Morris Agency to form William Morris Endeavor (WME). Since the merger, Emmanuel has grown the company into a mega entertainment corporation, buying sports and fashion agency IMG, mixed martial arts company UFC, The Miss USA and Miss Universe pageants, along with several other media-driven subsidiaries.

Emmanuel is known for his ruthless drive in the competitive business of Hollywood, and an initial public offering for his company would have made Endeavor the first agency-driven business to be traded publicly. Endeavor planned to use the public investment funds to pay off debt accumulated from purchasing its subsidiaries while also gaining fresh capital to continue growing.

With an excellent track record of growth and a diverse portfolio of successful subsidiaries, why did Endeavor’s valuation drop in the eleventh hour?

In recent weeks, the IPO market has been closing the door on unprofitable companies. Last week, the parent company of WeWork, the We Company, withdrew its IPO after investor interest turned out to be weak. WeWork filed its IPO paperwork in mid-August and was hit with intense scrutiny from investors when it showed to be unprofitable with concerns regarding its path to profitability. Investors are looking for a return on their contributions to a public offering, and they did not see a likely gain in the near future with WeWork.

The same goes for Endeavor: investors became concerned while gauging whether or not it was work the risk of investing in an unprofitable company. In its pre-IPO filing, Endeavor disclosed that it had made $2.05 billion during the first two quarters of 2019. However, it also reported an operating income of $10.3 million with a net loss of $223 million. On top of that, Endeavor is burdened with over $4.5 billion in debt from purchasing its various subsidiaries.

In the end, investors found Emmanuel’s vision for Endeavor to grow into an entertainment behemoth to be too far-fetched; they found Endeavor’s IPO to be too risky to partake in at its original valuation.

With the last-minute slash in expected share pricing, Emmanuel decided to withdraw the offering.

In a statement to Endeavor employees on Thursday, Emmanuel expressed that the company would continue to “observe market conditions” and potentially find a time more fit for a public offering.

Until then, how will Emmanuel bounce back from this flop? How will he create value in his company that makes it worthy for investment?

One can only imagine that he will, quite literally, “endeavor to persevere.”

Sources:

https://www.bloomberg.com/graphics/2019-unprofitable-ipo-record-uber-wework-peloton/

https://www.hollywoodreporter.com/news/endeavor-lowers-estimated-share-price-ipo-1241851

https://www.latimes.com/entertainment-arts/business/story/2019-09-26/endeavor-lowers-it-ipo-price-range-ahead-of-its-market-debut

https://www.investopedia.com/terms/i/ipo.asp

https://variety.com/2019/biz/features/endeavor-ipo-investors-debt-losses-capital-1203231982/

Kweichow Moutai becomes the first 1000-yuan stock in China

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The iconic baijiu produced by Kweichow Moutai.
(Photo credit to Kweichow Moutai’s official website)

After exceeding 1,000 yuan ($145) per share, Kweichow Moutai, the Chinese liquor giant’s share became the most expensive stock in China’s A-share market on June 27, 2019, aided by ever-growing demand.

While investors and analysts were not surprised by the strong performance of Moutai. Analysts from both Bloomberg and China International Capital Corp. Ltd. were optimistic about the continuous growth of Moutai’s share and raised their expected price of the stock.

A last-year forecast from Bloomberg predicted that Moutai’s share would hit the 1,000-yuan mark in 2019. Moreover, Tingzhi Xing, an analyst of China International Capital Corp. Ltd., also forecasted that 1,250 yuan would be the target price within 12 months.

Kweichow Moutai is a distillery from Moutai town in southwestern China’s Guizhou province. Moutai is famous for its iconic premium baijiu, a sorghum-based liquor, and it is usually used to serve at business meetings and official banquets. In 1972, Moutai was used to entertain President Richard Nixon on his historic visit to China.

President Richard Nixon and Prime Minister Enlai Zhou were tasting Moutai at the reception dinner in 1972. (Photo credit to news.ifeng.com)

Just as the western world’s obsession with premium wines, Chinese consumers are fond of baijiu. Thus, the consumption of high-quality baijiu in China is vast and still growing. As a representative of high-end baijiu, Moutai creates considerable profits.

According to the data cited by China Daily, an official Chinese English-language newspaper, the total revenue was 75 billion yuan, and its net profit was 34 billion yuan in 2018. Both its total revenue and net profit increased 23% over the previous year. Furthermore, the sales of Moutai rose 14% over 2018 to 100 billion yuan in total, and its net profit achieved by 45 billion yuan.

Another report released by China’s Guizhou province shows that the overall GDP of Guizhou province is 1.48 trillion yuan, and Moutai’s value now attained 1.24 trillion yuan in 2018. It means that the value of Moutai dominates nearly 85% of provincial GDP.

(Photo credit to Bloomberg)

Besides being the most valuable stock in China’s A-share market, Kweichow Moutai also surpassed Diageo in 2017 and became the most valuable liquor company in the world, according to Refinitiv, a financial technology and data company based in London. Diageo is a British multinational drinks company and the owner of Johnnie Walker.

Due to the generous profits and ever-increasing demands of Moutai, analysts foresaw that the price of Moutai’s share would keep going in the future. “I can’t see any growth cap on the company in the long run, unless the Chinese don’t drink one day,” fund manager Dai Ming told WARC, the global specialist information company, in a marketing report. “The liquor culture is deep-rooted in China, and when you do business here, you drink. It’s a product with demand outstripping supply, so growth is quite visible.”

Black Monday 1987

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NY Times Front Page

NY Times Front Page

We’ve been looking at the financial crisis of 2008 and seen how it impacted several facets of the economy, including the stock market. It made me want to take a look back at the market crash of 1987,  known as “Black Monday,” which is the greatest single day collapse in market history.

On the morning of October 19th, 1987, the downturn initially started in Asia before sweeping to western markets. The Dow Jones, a leading index that measures 30 large American public companies, fell 508 points — nearly 23 percent in one day. This accounted for about $500 billion in losses. Every index was crushed, though, with the S&P 500 also diminishing by about 20 percent on the day. Chaos ensued. Nervous investors tried contacting their brokers to take their money out of the market, but many were unable to get through because of the high influx of calls.

The Dow shot down 508 points on Black Monday

The Dow shot down 508 points on Black Monday

The crash was extraordinarily improbable. Professor Henry T.C. Hu of the University of Texas calculated it was a “25 standard deviation event,” which meant  “if the stock market never took a holiday from the day the earth was formed, such a decline was still unlikely.”

What made the misery all the more glaring was the run Wall Street had been on. The Dow had recently peaked in August of ’87 at 2722 points, which was an increase of more than 40 percent on the year. More confusing was the lack of a news event — like the subprime mortgages in 2008 — that would seem to trigger such a drastic fall. The week prior, the market had seen a correction that was sharp, with the Dow dropping more than 3 percent on two different days, but it was relatively inconsequential compared to what happened on the 19th.

Computers were new trading instruments in 1987 -- and many blamed them for the crash

Computers were new trading instruments in 1987 — and many blamed them for making the crash worse

Many analysts pointed to the rise in computer trading as exacerbating the problem. Program trading was relatively new at the time, and algorithms that calculated when to sell securities were triggered by the decline in share prices — which lead to a bigger crash. Today, virtually every trade is made electronically, but in the video below you can see two analysts who were less than thrilled with the technological advances the market had seen.

 

Class favorite Michael Lewis, who was working for Solomon Brothers back then, talked about how selling futures contributed to the hysteria.

The damage was so severe that the idea of closing the market for a day or two to “cool off” was even floated. Thankfully that didn’t happen, and the Federal Reserve pumped money into financial institutions and urged lenders to continue as if everything was normal (this sounds familiar from class). The Fed wanted to maintain liquidity and buoy investor confidence, and to a large extent this worked. The markets recovered slightly over the last two months, and closed slightly up for the year.

Still, the aftershock was felt for some time, with Wall Street not recovering to its 1987 marks until 1989. In an effort to curb a high volume of panic trades in the future, circuit breakers were put in place to pause trading and give investors time to process information before trading. Now, the New York Stock Exchange stops if the Dow falls 350 points from the previous day, or 200 points in one hour.