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Endeavor, WWE Deal Looks to be Win Win–At Least in the Long Term
Endeavor, WWE Deal Looks to be Win Win–At Least in the Long Term
April 17, 2023
Endeavor, WWE Deal Looks to be 'Win Win'–At Least Long-Term
Endeavor Group (NYSE: EDR) plans to combine the UFC with World Wrestling Entertainment (NYSE: WWE) to form a new publicly traded sports and entertainment conglomerate with a valuation north of $21 billion. Endeavor will control 51% of the NewCo, WWE investors will own the balance. It will trade under the symbol TKO once the merger is completed later this year.
The deal looks to be a win for both parties–at least long-term.
EDR is gaining control over the global sports entertainment promotion and a path to meaningfully more ownership.
On the other side of the table, Vince “McMahon [gets] to stick around and there’s significant upside, even from this level, [to be realized] over the next couple of years based on the combined free cash flow of this asset,” Curry Baker (director, media and entertainment equity research, Guggenheim Partners) said.
The transaction valued WWE at a $9.3 billion EV.
The industrial logic behind the acquisition makes sense.
“There frankly were more [cost and revenue] synergies here than anywhere else,” Baker said.
There could be as much as $200 million worth of revenue synergies to be gained across international media rights (see: U.K., Canada, and India), licensing, premium hospitality, and sponsorship over the next two years.
The latter is a category WWE has historically under monetized, and one that Endeavor should be able to help with.
“[WWE] did about $40 million of sponsorship last year,” Baker said. “UFC does $140 million plus with less product and [fewer domestic] eyeball impressions.”
Anyone who has ever watched a UFC event and a WWE show would recognize why that is. While the Octagon is covered in sponsor logos, WWE’s ring, skirt, and ramp all remain pristine. One must assume EDR will sell those assets and capture the associated revenues.
Endeavor has yet to provide a breakdown of where the $100 million plus in operative cost savings it anticipates will come from.
But it seems likely that much of the ‘fat’ trimmed will be on the WWE corporate line.
“There’s just a lot of overlap in terms of media rights negotiations around the world, sponsorship and running that business, that could be folded together,” Baker said.
Endeavor will control 51% of TKO at the outset.
“They would have liked to effectively own all of WWE [today],” Baker said. “Their balance sheet just didn’t really allow for it.”
But the deal provides a path to owning significantly more of the business over time.
“If you look at [the] combined free cash flow, [the proforma number] is probably going to go from ~$750 million last year, when you exclude the one-time HQ buildout at WWE, [to $1.3 billion in ‘26] as the new [domestic WWE and UFC] media contracts kick in,” Baker said.
EDR could use that cash to take out WWE shareholders through buybacks.
While it is a lengthier and more expensive way to acquire the company than a cash purchase would have been, it was the only path given Endeavor's balance sheet limitations.
The deal seems to make sense from a long-term perspective.
However, Endeavor could find it difficult to get a full sum of the parts equity valuation in the interim. Investors that were in EDR for the UFC now have a pure-play way to invest in the MMA promotion.
“People have been buying WWE as the de facto way to play the TKO asset. And if you look at the stock price of WWE, from April 3 through today, you can kind of see that rotation,” Baker said.
WWE shares are up 15% since the deal was announced, while EDR shares are up 2%.
Of course, the deal allows TKO to “move cash and cash flow up to Endeavor and buy back Endeavor stock if the discount [ever] got too egregious,” Baker said.
The merger looks as if it makes sense from the WWE perspective too–or at least from Vince’s perspective.
Remember, with over 80% of the votes, McMahon controlled the WWE board. Any transaction involving the company required his approval.
Liberty Media is known to have been involved in the sale process to the end.
“But Vince thought Endeavor was the better long-term partner,” Baker said.
The deal allows him to remain around the company, though it is unclear exactly what his role as executive chairman of WWE will entail or how involved he will be on the creative end.
It also allows him to defer any potential tax implications that would have come with an all-cash offer and participate in some of the combined company’s upside.
“Then if Endeavor wants to take him out, effectively through buying back TKO stock, where things are going, if you’re doing $1.3 billion in free cash flow on a business like this in ’26, based on where these things typically trade at, [it] is probably a $30 billion market cap company,” Baker said.
That would mean a stock price of $160-$180. WWE shares currently trade at ~$105/share.
Comcast would have been a logical buyer too.
“NBCU wants to retain the RAW rights this renewal cycle and are [believe to be] willing to pay up for them. They’re possibly looking at SmackDown as well,” Baker said. “And for them, [WWE] could have backed into a buyer’s multiple that was somewhere between 8-10x depending on what step up they are assuming or underwriting for in this upcoming renewal.”
But it seems unlikely Comcast would have kept McMahon around.
Endeavor will work on repricing its domestic WWE package this year before turning its attention to U.S. UFC rights next year.
Look for the company to make the two deals co-terminus over the next cycle and to re-evaluate where the media ecosystem stands come 2030.
The strategy would open the door to the possibility of “a big media player coming in and kind of owning [fight sports] broadly,” Baker said. One could envision the company
depending on how the landscape evolves over the next decade or two.
It would also give TKO the flexibility to go down the direct-to-consumer path should that become a viable solution, be it here in the U.S. or in select international markets.
In the meantime, expect WWE and UFC's existing domestic rights holders to maintain their current packages.
“NBCU’s going to keep RAW,” Baker said, “and I think Disney retains the UFC and certainly pays up for the PPV portion of that contract.”
It’s less clear as to how Fox plans to prioritize SmackDown.
But WWE has indicated there is interest from the tech giants (think: Google, Apple, Amazon) should Fox decide to punt on the Friday night show.
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