Andrew Bary

A battle could soon play out in Delaware courts between a group of institutional investors in Endeavor Group Holdings and Silver Lake, the tech investment firm, over Silver Lake's deal to buy out public shareholders for $27.50 a share in cash.

Endeavor, which is led by Hollywood superagent Ari Emanuel, counts as its most valuable asset a majority stake in TKO Group Holdings, which owns UFC (Ultimate Fight Championship) and WWE (World Wrestling Entertainment).

Since the $13 billion, take-private deal was unveiled in April 2024, TKO's stock has surged almost 75% to $157 and the value of the TKO embedded in each Endeavor share has risen to nearly $40 a share from $20. There is roughly 0.25 share of TKO embedded in each Endeavor share, based on Wall Street estimates including one from Citigroup analyst Jason Bazinet in a report from December.

Endeavor shares were down 0.5% Monday to $30.44 but trade above the deal price with the transaction expected to close by the end of the current quarter. TKO stock gained 1.2% to $157.05.

Endeavor has other assets including a sports and talent management business including WME (whose core includes the former William Morris Agency) that could be worth another few dollars a share, putting the total value of the company comfortably above $40 a share, according to Roy Behren, co-president of Westchester Capital, which runs the $2 billion Merger Fund, an owner of Endeavor stock.

"There will be tons of shareholders seeking appraisal," he says. "This is one of the most popular trades in the merger and event-driven community. This is a really unfair transaction for public shareholders," Behren says.

As it now stands, Silver Lake and the Endeavor management participating in the take-private deal stand to reap a $6 billion windfall from the rise in TKO stock since the deal was announced last April.

Many Endeavor shareholders want a share of that windfall.

The way it works is that Endeavor holders who feel the takeover price of $27.50 a share undervalues the company can seek appraisal rights in Delaware Chancery Court and ask a judge to grant them more than $27.50 a share. The courts can grant investors more or less than the deal price depending on the judge's ruling.

The deadline for submitting appraisal rights is believed to be Tuesday, Feb. 4, based on a long Endeavor filing in January where it stated the deadline would be 20 days from Jan. 15.

Shareholders who don't plan to seek appraisal rights may want to consider selling their shares because Endeavor stock may fall towards $27.50 after the appraisal deadline.

Silver Lake told Barron's recently in a statement: "We believe the transaction price is fair and will not increase it." Silver Lake declined to comment further and Endeavor had no comment.

A who's who of leading risk-arbitrage and special-situations investors hold Endeavor.

The largest outside investor is Troluce Capital Advisors which recently boosted its stake to 35.5 million shares, a roughly 8% stake in the company. Other holders include Pentwater Capital, a well-regarded firm that engages in takeover arbitrage; and Millennium Management, the multi-strategy firm headed by billionaire Israel (Izzy) Englander. Barron's counts at least 80 million shares -- roughly a third of the estimated public float of about 240 million shares, that may seek appraisal rights.

Most of the shareholder holdings are as of Sept. 30, 2024, and it is estimated that more Endeavor shares have since migrated to institutional holders who may exercise appraisal rights. There will be a better sense of the appraisal landscape once big investors release their Dec. 31 holdings around Feb. 14.

The little-known appraisal process isn't normally pursued by investors because of the time and expense involved -- a complex process that can take two to three years. It can be tough for individual investors. An Endeavor filing in January states that "failure to precisely follow" statutory rules on appraisal rights could doom an investor's ability to pursue them.

In these proceeding, investors argue that the deal price has short-changed them and they often bring experts to buttress their case while a company maintains otherwise. A Delaware Chancery Court judge then renders a decision and investors can get more or less than the deal price.

The key date for determining fairness is the closing date of the transaction, according to a 2022 article by Skadden Arps lawyers and the language of Endeavor's recent filing supports that. This should benefit investors seeking appraisal rights since Endeavor is worth considerably more now than in April 2024 due to the rally in TKO shares.

Often, appraisal cases boil down to dueling estimates of a company's value based on discounted cash flow analysis, which is subjective. But with Endeavor, investors seeking the appraisal rights can point to the easily measurable value of TKO stock. Silver Lake could argue that the TKO stock should be adjusted downward for any taxes that shareholders might incur in a potential distribution.

Another issue that the Delaware courts may weigh in fairness.

While the deal got approval of the Endeavor board, public shareholders weren't given a vote on the transaction.

Such a vote is considered to be good governance and has been regularly employed by control shareholders like media mogul John Malone in deals. In these situations, deals are contingent on the support of the majority of public shareholders unaffiliated with the control holder. The lack of such a vote could help those seeking appraisal rights.

In the Endeavor situation, key management members led by Ari Emanuel will participate in the deal with Silver Lake. Management owns 49 million shares while Silver Lake holds 174 million out of a total of around 470 million.

What obligation does management owe to public holders? It is tough to argue that the current price is fair to holders. As a result, it's possible that the Endeavor board and management may be sued by shareholders for breaching fiduciary obligations to investors.

One plus for shareholders seeking appraisal rights is that they are entitled to get paid interest at five percentage points above a key short rate -- resulting in a rate of about 9% from the date the deal closes until a judge's ruling. Given this high rate, some companies make partial payment to those seeking appraisal rights soon after the deal closes, enabling them to save on interest costs.

So what may happen? It's possible that despite its insistence otherwise that Silver Lake boosts the value of its offer for Endeavor in an effort to dissuade investors from seeking appraisal. Silver Lake could stand pat, betting that the potential cost of appraisals is less than paying all public holders more than $27.50. It's also possible that Silver Lake tries to cut a deal with shareholders seeking appraisal rights.

It promises to be an eventful few months for Endeavor and its shareholders. Key events to watch are the disclosure of investor holdings of the company on Feb. 14 and any potential statements from big holders on their intentions.

Write to Andrew Bary at andrew.bary@barrons.com

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February 04, 2025 03:00 ET (08:00 GMT)

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