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Mixed martial arts powerhouse UFC and sports entertainment giant WWE are betting that they are even stronger together. So executives from UFC owner Endeavor and WWE, fresh off WrestleMania 39 weekend in Los Angeles, stepped into the spotlight to unveil a merger to form a global live sports and entertainment titan, 51 percent controlled by Endeavor and 49 percent owned by WWE shareholders.
The opening bell for the new tag team and its stock, under ticker symbol TKO, is only officially set to sound during the second half of 2023, when the partners expect to close the deal. However, Wall Street on Monday analyzed the deal details and initial management commentary, finding some investor questions answered and others raised.
Will another bidder emerge?
The leak of the planned deal on April 2 “should ease investor skepticism concerning Vince McMahon’s seriousness about selling the company,” emphasized Wolfe Research analyst Peter Supino in a report written before the official deal announcement. “Many, including your Wolfe Research media team, have wondered whether Vince would really sell.“
One new question heard from some on April 3 was whether this deal pins down WWE for good or if rival bidders could emerge to embark in a battle royal. The “leak is probably designed to draw out competitive interest in acquisition of WWE,” Supino suggested. “Among the entities with the financial firepower and strategic rationale to own WWE [are] Saudi Arabia, Comcast, Fox, Amazon, Liberty and Netflix,” he wrote, calling the streaming giant an outside contender.
Meanwhile, Wells Fargo’s Steven Cahall argued that the UFC transaction marks the end of the line for WWE’s strategic review. “We do not expect another bidder for WWE as Endeavor seems like the most logical partner given its acquisitive nature and similar/complementary assets, including strong knowledge of the media market for selling content rights and managing talent,” he highlighted. “The premium is solid, and if McMahon is on board, then it’s done as WWE is a controlled company.”
What are the strategic benefits?
Size and muscle matter in the media and entertainment business. That is a key factor behind the combination. “The strategic rationale for this transaction is crystal clear as this creates a pure-play sports IP ownership entity,” wrote a team of Bank of America analysts led by Jessica Reif Ehrlich. “In addition, it is our view that EDR as a consolidated company was receiving a significant discount that did not appropriately reflect the true value of EDR’s full portfolio of assets. We believe this transaction is a first step to unlocking the underlying asset value within EDR’s portfolio.”
That sentiment was elaborated on by others on the Street. “The combined entity will have more leverage as far as media right negotiations, licensing opportunities and the like,” FBN Securities analyst Robert Routh noted in a report. “As a result, on a pro forma basis it is expected the combined TKO will be able to grow revenue faster and at a higher margin than either Endeavor Group or WWE could as stand alone entities.”
Jefferies analyst Randal Konik also lauded the deal as one for the digital age. “From a fundamental perspective, we like the assets of UFC and also WWE in a world where linear TV is losing market share to streaming, thus live sport content is in high demand,” Konik explained in a report. “The upcoming rights expirations for both WWE and UFC present meaningful upside opportunity to the cash flows of both the UFC and WWE in their own rights and will further drive earnings before interest, taxes, depreciation and amortization (EBITDA) margins in each franchise incrementally higher.”
But some may wonder if the combined giant will start selling combined rights to UFC and WWE programming. The team of analysts Brandon Ross, Rich Greenfield and Mark Kelly at LightShed Partners shot down that idea in a January report. “Does it make sense to bundle UFC and WWE rights?” they asked. “Probably not. More value has been created by atomizing sports rights than by selling more at once. The NFL is the prime example.”
What about cost synergies?
Cost synergies are there for the taking, Wall Street and management believe. Endeavor CFO Jason Lublin on Monday touted that the combination could secure $50 million to $100 million in annual operating synergies, in part by following the model of the UFC. After all, its integration by Endeavor delivered $70 million in cost synergies.
Whether the new firm is indeed able to pin down similar benefits is an open question. But Lublin pointed to a combined cost base of $1 billion, excluding direct operating expenditures. Half of that management sees as “addressable,” he explained. And he concluded: “We see significant operating synergies throughout the ecosystem.”
Supino highlighted the opportunity for “corporate expense efficiency,” plus additional benefits. “While hard to quantify for outsiders, we are confident that the combined company would enjoy additional synergies with distribution and talent,” he wrote and emphasized: “Such synergies are not in our math” or models so far.
Why did both stocks drop?
WWE shares took a hit, losing to the tune of 2.15 percent to close at $89.30. Meanwhile, Endeavor’s stock fell 5.89 percent to $22.52.
Wall Street experts had noted ahead of the deal confirmation that investor reaction would at least partly depend on the valuation put on the two companies and how much faith investors put in them. The agreement unveiled Monday gives UFC an enterprise value of $12.1 billion, while putting $9.3 billion on WWE. And the companies said the transaction puts a price of approximately $106 per share on WWE. While that would be a premium over WWE’s current stock price, unlike in a sale, WWE shareholders will not be paid out, but receive stock in the newly merged firm. “The big question is if the market agrees with UFC at $12 billion,” wrote Cahall.
The team of LightShed analysts had already explained in January that structuring a deal between the two companies could be complex. After all, “Endeavor’s stock has not worked (went public in 2021 at $24), and WWE’s has outperformed,” they explained. Because both companies are about to negotiate major rights deals that “could dramatically influence their future profitability,” the experts recommended investors analyze the deal based on their expectations for 2026 results, the first year both WWE and UFC will be fully in their next licensing cycle. But they also emphasized: “Our guess is current Endeavor shareholders believe their stock is not reflective of this outcome, whereas WWE has gotten credit for theirs.”
What does the deal mean for the remaining Endeavor?
With UFC being separated from Endeavor, investors are also wondering what will happen to the rest of the company, including WME, IMG, On Location and OpenBet. “We expect the core Endeavor business to remain extremely solid,” Konik emphasized in a Monday report. “The talent representation industry is consolidated. And the demand for content is growing ever by the day. The company’s live events business is also well suited in a consumer environment that is shifting spending towards experiences. And finally, the company’s betting business can thrive as legalization expands across more states within the USA. We also look favorably upon other owned businesses like the Miami Open and PBR. Put simply the Endeavor core is a solid, steady, highly profitable and growing entity.”
Shares of Endeavor were roughly steady before Monday’s stock market open. “No debt or incremental debt was involved with the structure of this transaction, proving management is highly committed to reducing the debt profile of the core Endeavor entity,” Konik pointed out. “We believe the market is very sensitive to debt levels in this environment.”
What about Vince McMahon?
WWE executive chairman and majority shareholder Vince McMahon will serve as executive chairman of the newly created firm, while Mark Shapiro will be president and chief operating officer of both Endeavor and the new company, with Ari Emanuel serving as CEO of both. Meanwhile, Dana White will continue in his role as president of UFC, with WWE CEO Nick Khan becoming president of WWE.
The fact that McMahon, who had returned to WWE early this year after in June of 2022, having ”voluntarily stepped back” from the firm amid a misconduct investigation by its board, will serve as executive chairman of the new company drew much attention Monday. The probe had focused on allegations that McMahon had sexual relationships with employees at the company and subsequently paid the women millions of dollars in severance packages, along with nondisclosure agreements.
One observer suggested there were likely multiple reasons for McMahon’s position at the combined company. First, he has remained the majority shareholder of WWE, meaning a sale needs his approval. And he has been understood to want to remain involved with the company.
At the same time, Wall Street experts have argued that Endeavor and investors would not want him in a major day-to-day executive post or in charge of WWE’s creative process, which has been led by his son-in-law and ex-wrestler Paul “Triple H” Levesque to positive reviews.
Endeavor’s solution is to let McMahon keep his current WWE title at the expanded company. He entered into an employment agreement with WWE, effective as of March 29, pursuant to which, retroactive to Jan. 9, he will continue to serve as executive chairman for a term of two years. That contract includes automatic extensions for additional one-year terms unless either the company or McMahon provides at least 180 days’ notice of non-renewal. But if McMahon gets terminated within the two-year period following a “change in control” deal, like the UFC combination, he is eligible to receive a big payout.
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