Ari-Adjusted EBITDA vs. Wall Street

Ari Emanuel in 2010
Photo by Bobby Bank/WireImage
William D. Cohan
June 23, 2021

“The only way to get to success,” Ari Emanuel recently told New Yorker writer Connie Bruck, “[is that] you realize you are going to fuck it up and you gotta just start going to work. There’s a boxing or UFC analogy: You gotta bite down on your mouthpiece and start fighting! You have to be willing to take the emotional damage. People get exhausted from that beating. I don’t know why I don’t.”

Emanuel, of course, was referring to his own bildungsroman of the super agent who becomes a legitimate Hollywood mogul. And like any screenplay, this story had some second act problems. Back in 2019, Emanuel had led Endeavor, his entertainment live-event business roll-up, to the brink of an I.P.O. before pulling out at the very last moment. Inside WME, his talent agency, morale plummeted, and Emanuel endured his fair share of wound-licking in a town that knows how to eat its own. But two years and a pandemic later, Emanuel appeared chastened yet unexhausted by the beating. WME had been slimmed down. Endeavor Holdings bought out the remaining position in UFC, one of its many live-event portfolio companies. Most mesmerizingly, Emanuel had positioned Endeavor as a “reopening play”—a serendipitous way for investors to bet on the revitalization of the global economy as the pandemic receded.

It seemed like a phenomenal Hollywood ending, but would Wall Street ever buy it? Emanuel deserves credit for building WME into a talent agency powerhouse, but I’ve long been skeptical about his talents as a C.E.O. While he correctly understood long ago that his agency needed greater scale to compete and cut deals with the tech giants, these deals themselves didn’t always make sense. For instance, Emanuel acquired IMG, the sports marketing company he long coveted, for $500 million more than his nearest competitor. By 2019, Endeavor Holdings had become a hodgepodge of assets—a bull-fighting and martial-arts business combined with a Hollywood talent and literary agency.

Moreover, Endeavor’s income statement could make a Dogecoin investor wince. At the time of the 2019 attempted I.P.O., Emanuel was hoping for an equity valuation of $8 billion. But since there was also $4.1 billion in net debt on the company, the proposed enterprise value of Endeavor was a robust $12 billion, or 46.3x the company’s 2018 EBITDA of $259 million. I couldn’t for the life of me figure out why investors would buy in at that ridiculous price. And they didn’t. After the market balked at his proposed equity valuation, he pulled the I.P.O.

In March 2021, when Emanuel tried again to take Endeavor public, the financial statement was still a bit of a disaster. In 2020, according to Endeavor’s new S-1, revenue fell 24 percent to $3.5 billion, driven by a 44 percent decline in “representation” revenue (presumably a casualty of the pandemic’s impact on film and television production) and a 20 percent decline in revenue from “events, experiences & rights” (ditto). Meanwhile, its net income was negative $625 million. And yet Endeavor valued the equity at $10.3 billion, not $8 billion. The net debt was now $5 billion, making the proposed valuation of the Endeavor enterprise more than $15 billion.

I was still skeptical that investors would buy into this new narrative, especially since Endeavor was an assiduous practitioner of the concept of “Adjusted EBITDA,” an increasingly popular trick on Wall Street that transmutes losses into profits by adding back all sorts of strange expenses to net income to make the EBITDA look real. In the I.P.O. prospectus, Emanuel and his partner Patrick Whitesell, who had each extracted $165 million in cash from Endeavor in 2017, had the temerity to present investors with an Adjusted EBITDA of $572 million for 2020—a $725 million swing from what was actually an operating loss of $153 million.

I had presumed that investors would be unwilling to take the bait on this Ari-Adjusted EBITDA, just as they balked at Adam Neumann’s infamous “Community Adjusted EBITDA” in the run-up to the WeWork I.P.O. But for whatever reason, this time really was different. The pandemic had made investors much more willing to take the kinds of crazy risks that they weren’t willing to take pre-Covid. Emanuel pulled off the I.P.O., at a big valuation. The stock traded up on its opening day, in late April, and still trades nearly 11 percent above the $24-a-share IPO price. The market value of Endeavor is now around $12 billion and the enterprise value is nearing $17 billion. Emanuel and Whitesell are together worth around $1 billion, making them near to qualifying for moguldom in Hollywood.

Over the years, I have repeatedly asked Emanuel for an interview. He has always declined, either directly, or through a colleague, or just by ignoring my request. (He did call me once, in 2015, to say he liked a story I had just written about WME-IMG.) It all felt a little like Sinatra’s guys constantly blowing off Gay Talese, which became the subtext of Frank Sinatra Has a Cold, perhaps the most memorable piece of magazine journalism ever published. I got it: Ari was busy, and he might not have wanted to talk with a journalist who was skeptical of his gifts as a corporate visionary. He didn’t need to blow me off when he had people on the payroll to do it.

But after the successful I.P.O., I asked to interview him again and was told that he could talk publicly only on the actual day of the I.P.O.—April 29—and then he could not talk about the company again until the “quiet period” ended 40 days later. I was a day late. Otherwise, I was told, Ari would have talked to me. I asked again the other day, after the expiration of the “quiet period.” Again, the answer was no. (Through a spokesperson, Emanuel declined to speak for this story.)

Fortunately, he and his fellow Endeavor executives—Mark Shapiro, the president, and Jason Lublin, chief financial officer—just had their first public conference call with Wall Street research analysts. Emanuel was charming and hugely optimistic about Endeavor’s prospects. “We weathered the storm,” he gushed. He reminded listeners that UFC and bull-riding were two of the first sports to resume live events in 2020 “and two of the first to bring full crowds back.” He said these two sports provided a “blueprint” for Endeavor’s entire “portfolio,” from the Frieze Art Fair to EuroLeague Basketball.

Quarterly earnings calls are usually C.E.O. spinfests, and this was no different. There was the great success of the Great Ocean Road Running Festival, in Australia, with 9,000 runners, and Australian Fashion Week, in Sydney. The Taste of London event, set for July, sold out quickly, as did The Big Feastival, also in the U.K. Emanuel was happy to announce that the International Olympic Committee had named On Location, the events company that Endeavor acquired last year, as the “official global hospitality provider” for the three Olympics beginning with the Paris games, in 2024.

Emanuel also noted that the demand for live events was picking up rapidly and that recent media M&A activity, such as Discovery’s merger with WarnerMedia and Amazon’s acquisition of MGM, demonstrated that “content is in high demand and [in] short supply” and “that our positioning in this ecosystem favors long term growth.” He spoke about a variety of other opportunities, too. “We benefit from all trends in media content, sports, events and gaming, and remain well positioned to continue capitalizing on and growing alongside the high growth industries in which we operate,” he said. The shrieker famously portrayed by Jeremy Piven had now fully embraced the lingua franca of corporate jargon.

Shapiro, for his part, related how Endeavor’s hodgepodge of businesses could benefit customers. He explained how, in March, Endeavor signed a multi-year deal to make DraftKings the official sports book and daily fantasy partner for UFC in the United States, and how 160over90, Endeavor’s marketing agency, had been hired to handle the partnership’s “experiential” and social media. This “architecture strategy,” Shaprio explained, was developed by Harvard Business School professors in 2019 and has “now become the backbone of the way we operate internally.” If you were worried about Endeavor’s “multi-hyphenate clients”—those who “move effortlessly across lanes” from linear TV, to streaming to music, audio and, yes, TikTok and Instagram—they are “booked solid for the next year,” Shapiro said.

Lublin shared the cold-hard fact that if it hadn’t been for UFC, bullfighting, and EuroLeague, Endeavor would not be the “reopening” play that Emanuel had promised investors. In the first quarter of 2021, this segment of Endeavor’s business generated revenue of $284 million, up 22.1 percent from the first quarter of 2020. Revenue in Endeavor’s events business, on the other hand, was down 19 percent in the first quarter compared to the previous year, while its representation business was down 15 percent.

Still, Lublin remained optimistic for the rest of 2021. Endeavor’s revenue would come in between $4.76 billion and $4.83 billion—thanks for the precision, Jason—and Adjusted EBITDA would be between $735 million and $745 million. The company intends to pay down $600 million in outstanding debt in the third quarter.

I was amazed, listening to the call, that Lublin got away with boasting about $745 million in Ari-Adjusted EBITDA without a single financial analyst asking for details about his accounting jiu jitsu. Endeavor’s net income, as reported to the Securities and Exchange Commission, was around negative $576 million for the 12 months ending in March. By contrast, Endeavor’s “Adjusted EBITDA” was a miraculous (and positive) $595 million: a swing of $1.17 billion. Such is the new normal on Wall Street, at least until the worm turns.

So, yeah, Ari, you pulled it off. You took Endeavor public. The company’s equity is worth $12 billion. You’re almost a billionaire. But at some point, and soon, your company is going to have to make some real money, without any of the fun little accounting tricks that investors are letting companies get away with these days. I would lose the troika of “certain legal costs,” “equity method losses,” and “merge, acquisition and earn-out costs,” among others, and dial-back the promises of over-achievement. Settle into your actual, not “Adjusted,” EBITDA and let the valuation chips fall where they may.