The age of free capital came to an abrupt end for a series of companies lined-up to go public in late 2019; amongst them was UFC owner WME, who got caught up in the midst of a series of spectacular events late in the year.
Pay attention to the numbers in the article. It’s important.
So every year, companies will take their prospectus to retail stock-market investors as a method to raise capital to fund their future operations or as a means to get the market to reward their previous efforts, for having set the company up for future wealth creation.
WME and its owner Ari Emmanuel can certainly claim to have delivered on both counts after building up a powerful talent management business and then positioning the company for growth with the recent purchase of the ownership rights to the ‘Ultimate Fighting Championship’ brand, valued at ~$4B dollars.
Then they tried to go public.
Over the last 10 years, the Capital Markets seemed to have a certain patience. Investors were willing to sit back and let companies be unprofitable while they supported brazenly extended valuations. Your company could be selling as little as $100 million in total revenue, but get a $20B valuation. So, if the owners tried to sell 40% of the company, you can collect about $8B, cash. You can then use that in a combination of ways; to grow the business, reward your firm & employees with wealth; set-up a war chest; buy a sports team; etc. Fast forward to mid-2019, and the market has just about had it. A decade-long darling, Uber, shows up shiny and takes a thorough dressing-down. The company expected to go public at $80B. That’s what they wanted. They got a collective ‘ha’. They premiered at $47B. That’s a biblical write-down. $40 billion just disappeared. Poof.
Then came this firm called WeWork asking to go public at a $47B dollar valuation. They had that about that much in committed lease payments owed to landlords going into the future i.e straight debt-burden. This also means any business commitments they made, they made at that $47B valuation. In the weeks of publicizing their stock offering, interest was so low they expected to go public at a petty $12B. Now that’s a proper write-down. Straight 75%, no mucking about. It was so bad that the number of balance sheets that were expected to go broke as a domino effect was expected to hit the US real-estate market as-a-whole because of unpaid bills.
WeWork decided against going public, likely raising money privately through private investors & institutions that will set stern terms. Everybody who was lined-up behind, beside & around the WeWork IPO started to take phenomenal write-downs which finally came to WME’s doorstep. Whether they were worth it or not, WME likely arrived at the swift logic that they’d be leaving several billion-dollars on the table, by going public now. They shelved their plans and have left the turmoil, likely with a sour taste. It’s not always you see Hollywood go Wall Street. Hope no one at WME made any large purchases expecting cash from the IPO last year. But if they’re patient, there is plenty of riches awaiting that crew in the future.
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