Mixed martial arts powerhouse UFC and sports entertainment giant WWE bet they’re even stronger together. So, fresh off WrestleMania 39 weekend in Los Angeles, executives from UFC owner Endeavor and WWE 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 ownership by WWE shareholders.
The opening bell for the new tag team and its stock, under ticker symbol TKO, will not officially ring until 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, answering some investor questions and asking others.
Will another bidder show up?
The leak of the planned deal on April 2 “should allay investor skepticism about Vince McMahon’s seriousness about selling the company,” Wolfe Research analyst Peter Supino stressed in a report written ahead of the deal’s official announcement. “Many, including your Wolfe Research media team, have wondered if Vince would really sell.”
A new question heard from some on April 3 was whether this deal locks WWE in for good or if rival bidders could rise to compete in a battle royal. The “leak is likely intended to spark competitive interests for the WWE acquisition,” 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 for WWE’s strategic review. “We do not expect a new bidder for WWE as Endeavor appears to be 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 stressed. “The bounty is solid, and if McMahon is on board then it’s done as WWE is a controlled company.”
What are the strategic advantages?
Size and muscle strength are important in the media and entertainment industry. That is an important factor behind the combination. “The strategic rationale for this transaction is crystal clear as it 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 opinion that as a consolidated company, EDR received a significant discount that did not reflect the true value of EDR’s entire portfolio of assets. We believe this transaction is a first step in unlocking the value of the underlying assets within EDR’s portfolio.”
That sentiment was fleshed out by others on the street. “The combined entity will have more leverage in terms of media rights negotiations, licensing opportunities and the like,” FBN Securities analyst Robert Routh noted in a report. “As a result, on a pro forma basis, the combined TKO is expected to be able to grow revenue faster and at a higher margin than either Endeavor Group or WWE as standalone entities.”
Jefferies analyst Randal Konik also praised 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, so live sports content is in high demand,” Konik explained in a report. “The impending rights expirations for both WWE and UFC provide a meaningful upside opportunity for both the UFC and WWE’s cash flows in their own rights and will incrementally increase earnings before interest, taxes, depreciation and amortization (EBITDA) in each franchise. .”
But some may be wondering 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 best example.”
What about cost synergies?
Cost synergies are up for grabs, Wall Street and management think. Endeavor CFO Jason Lublin said Monday that the combination could generate $50 million-$100 million in annual operating synergies, in part by following the UFC’s model. After all, the integration by Endeavor delivered $70 million in cost synergies.
Whether the new company can indeed pin down similar benefits is an open question. But Lublin pointed to a combined cost base of $1 billion, excluding direct operating expenses. Half of that management considers it “addressable,” he explained. And he concluded, “We see significant operational synergies across the ecosystem.”
Supino highlighted the opportunity for “business cost efficiency”, plus additional benefits. “While difficult for outsiders to quantify, we are confident that the combined company will enjoy additional synergies with distribution and talent,” he wrote, emphasizing, “There are no such synergies in our math” or models to date.
Why have both stocks fallen?
WWE shares took a hit, losing 2.15 percent to close at $89.30. Meanwhile, Endeavor’s stock fell 5.89 percent to $22.52.
Wall Street pundits had noted prior to the deal confirmation that investor reaction would depend at least in part on the valuation placed on the two companies and how much confidence investors place in them. The deal, unveiled Monday, gives UFC an enterprise value of $12.1 billion, while putting $9.3 billion on WWE. And the companies said the transaction places a price of about $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 will receive shares in the newly merged company. “The big question is whether the market will agree with UFC at $12 billion,” Cahall wrote.
The team of LightShed analysts had already explained in January that structuring a deal between the two companies can be complex. After all, “Endeavour’s stock hasn’t worked (went public at $24 in 2021), and WWE’s has outperformed,” they explained. As both companies are about to negotiate major rights deals that “could dramatically affect their future profitability,” the experts advised investors to analyze the deal based on their expectations for 2026 results, the first year that both companies WWE as UFC are fully into their next licensing cycle. . But they also stressed, “Our guess is that current Endeavor shareholders don’t think their stocks reflect this outcome, while WWE took credit for theirs.”
What does the deal mean for the remaining Endeavor?
With UFC separating from Endeavor, investors are also wondering what will happen to the rest of the company, including WME, IMG, On Location, and OpenBet. “We expect Endeavor’s core business to remain extremely solid,” Konik stressed in a Monday report. “The talent representation industry is consolidated. And the demand for content is growing day by day. The company’s live event business is also well-suited in a consumer environment where spending is shifting toward experiences. And finally, the company’s gambling business can thrive as legalization expands to more states in the US. We also favor other owned companies such as the Miami Open and PBR. Simply put, the core of Endeavor is a solid, stable, highly profitable and growing entity.”
Shares of Endeavor were about stable before the stock market opened Monday. “There was no debt or incremental debt involved in the structure of this transaction, demonstrating management’s strong commitment to reducing the debt profile of the core Endeavor entity,” said Konik. “We believe the market is very sensitive to debt in this environment.”
What about Vince McMahon?
WWE executive chairman and majority owner Vince McMahon will serve as executive chairman of the newly created company, while Mark Shapiro will serve as 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, while WWE CEO Nick Khan becomes president of WWE.
The fact that McMahon, who had returned to WWE after June 2022 early this year after “voluntarily relinquishing” the company amid an investigation into misconduct by the board of directors, will serve as executive chairman of the new company , attracted a lot of attention on Monday. . The investigation focused on allegations that McMahon had sexual relations with company employees and then paid the women millions of dollars in severance pay, along with non-disclosure agreements.
One observer suggested there were likely multiple reasons for McMahon’s position with the combined company. First, he has remained the majority owner of WWE, which means any sale would need his approval. And he has been heard to want to stay involved with the company.
At the same time, Wall Street pundits have argued that Endeavor and investors wouldn’t want him in a major day-to-day executive role or in charge of WWE’s creative process, which was 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 with the expanded company. He entered into an employment contract with WWE, effective March 29, under which he will serve as executive chairman for a two-year term, retroactive to January 9. That contract includes automatic renewals for additional one-year terms unless Company or McMahon gives at least 180 days’ notice that the renewal will not be renewed. But if McMahon is terminated within the two-year period following a “change in control” deal, such as the UFC combination, he will be eligible for a large payout.
