Endeavor's Buyout Battle: Hedge Funds Clash with Silver Lake Over Pricing

A little over a month ago, just prior to Silver Lake finalizing its $25 billion agreement to make Endeavor a privately-owned company, Carl Icahn revealed that he had amassed a significant holding in Endeavor.

At first glance, this seemed like an unconventional purchase. Over the last year, Endeavor had mostly traded above the $27.50 per share that shareholders were set to get from the acquisition. Recently, he noticed a strategy that hedge funds had started adopting: engaging in a type of merger arbitrage which might compel Silver Lake to boost its returns to stakeholders.

Multiple investment funds have initiated legal action in the Delaware Chancery Court with the aim of having their share values reassessed. As of Thursday, four additional funds had submitted petitions challenging the transaction. These new filings bring the total number of participating funds to at least twelve, including entities like Fifth Lane Partners Fund and North Commerce Parkway Capital, along with various subsidiaries affiliated with HBK Capital Management Group LP and UBS Group AG. Their strategy hinges on the substantial approximately 75 percent increase in the value of TKO Group Holdings' stock—most of which belongs to Endeavor—that has occurred since the announcement of the merger back in April 2024. The investors believe this significant rise indicates that the current buyout proposal may significantly understate the true worth of the company behind WWE and UFC, thus positioning themselves for potentially larger payouts through court intervention.

So far, investment groups managing over $1 billion worth of Endeavor stock have joined the lawsuit. These investors are utilizing “appraisal rights,” a legal mechanism through which unhappy shareholders seek a recalculation of their shares' true value. Sources indicate that additional filings, along with further suits accusing Endeavor leaders like Ari Emmanuel and Patrick Whitesell of breaching their fiduciary duties—on behalf of investors holding tens of millions of shares—are anticipated in the upcoming weeks. The Hollywood Reporter .

On March 3, before the completion of the transaction, Silver Lake made an uncommon statement that was broadly interpreted as a message to arbitrageurs. They declared that they consider the purchase price fair and do not intend to raise it further. The company also mentioned: “Reports suggest that significant blocs of shareholders have engaged in arbitration with the aim of seeking valuation adjustments.” Furthermore, Silver Lake stated their belief that extensive trades conducted by several hedge funds—many having acquired considerable stakes in Endeavor’s shares post-announcement—are responsible for unnaturally inflating the share price.

The statement "appears to be an attempt to use fear tactics to force out inexperienced or naive investors," noted Roy Behren, who serves as co-chief investment officer at Westchester Capital Management. to Bloomberg Last month, they stated, "We are ready to assert our appraisal rights for our investors and will continue this pursuit indefinitely due to the evident injustice the offer price inflicts upon minority stakeholders."

During the valuation process, the court will assess Endeavor’s worth at the time the deal concludes instead of when Silver Lake initially disclosed the transaction, along with several other factors. Although WME constitutes Endeavor’s principal asset, TKO stands out as one of its most valuable possessions. Furthermore, the company holds approximately 59% ownership in TKO. The investors contend they deserve increased compensation since the agreement fails to factor in the significant rise in TKO’s value to record levels within the last twelve months.

According to Silver Lake's perspective, they should not be required to pay extra due to investors tampering with the stock price, as this would be in an effort to pursue appraisal claims.

The law overseeing appraisals is quite comprehensive, stating that courts must take into account “all pertinent elements” in establishing fair value. This might work to the advantage of the investors. Before the agreement, Silver Lake held 71% of Endeavor’s voting power, with co-CEO Egon Durban and managing director Stephen Evans serving on the board's executive panel. It appears they did not solicit offers from external parties interested in acquiring Endeavor. The general public stockholders were not consulted either. Although holding such a vote isn’t required, several firms choose to do so; this was exemplified when Charter declared its plan to purchase Liberty Broadband through an all-share arrangement earlier last year.

In the case of an appraisal proceeding, one distinctive aspect is that there’s no opportunity for motions practice. This means there isn’t an easy way to exit the lawsuit because such proceedings aren’t eligible for dismissal or summary judgment. Instead, a fair value hearing will take place. Furthermore, those participating as shareholders have the right to receive interest at a rate of five percent over the Federal Reserve rate—approximately nine percent—from the time the transaction was completed until the court reaches its verdict. However, corporations do have the option to make early payments to avoid accruing additional interest costs.

The deadline for submitting requests to exercise appraisal rights was February 4th.

Additionally, there could be breaches of fiduciary duty lawsuits anticipated in the upcoming weeks. The funds remain optimistic as they believe the courts will support their claims since the transaction lacks protection from a majority approval by minority stakeholders, despite being discussed with a specific committee made up of Endeavor’s non-affiliated board members.

During the buyout, Endeavor executives Ari Emanuel and Patrick Whitesell received nine-figure cash payouts.

Silver Lake and Endeavor chose not to comment.