Sometimes, slower is better on Wall Street…
That’s especially true when evaluating planned mergers. Just look at the recent move to combine UFC – which Endeavor Group (EDR) currently owns – with World Wrestling Entertainment (WWE)…
The two sides announced the deal last Monday. This merger will combine the biggest name in mixed martial arts and the biggest name in professional wrestling.
But at first, many experts didn’t like the deal. And investors reacted in kind. Both stocks fell about 10% intraday after the announcement.
I understand the gut reaction…
After all, the deal does look expensive at first glance. UFC’s current value is around 20 times its operating profits. And I peg the ratio of WWE’s value to its operating profits at about 29.
In comparison, the median figure for all the companies in the S&P 500 Index is roughly 11.
But Morgan Stanley (MS) captured the bigger picture of the planned merger. The investment bank referred to the combined company as a “uniquely attractive asset.”
And as I’ll explain today, that’s why we should watch how this situation plays out…
This is a complex deal…
It’s not a merger of equals between Endeavor and WWE. And one company isn’t buying the other one. Here’s a simplified breakdown…
When the deal closes, existing WWE stockholders will get shares of “NewCo.” (Its ticker will be TKO. Get it?) This stake will make up 49% of NewCo.
Meanwhile, Endeavor will remain an independent company. And it’s essentially “selling” its UFC business. But instead of being paid in cash, shareholders will get stock equivalent to the other 51% interest in NewCo.
Besides UFC, Endeavor owns the Professional Bull Riders series. It’s also part of a joint venture that runs EuroLeague Basketball. And the holding company’s portfolio includes event-staging and talent-representation businesses as well.
The key to NewCo’s success is its standing in the entertainment world…
The competition for consumer attention is fierce. Movies, broadcast TV, and cable are old hat. Streaming services, online videos, social media, and music platforms now reign.
But due to their immediate satisfaction, live sports stand out as an exception. Streaming, gambling, and merchandising licenses add unprecedented value.
That’s why pro sports teams are more valuable than ever. Last August, Forbes magazine estimated that NFL teams were worth an average of 33 times their operating profits.
That’s why investors shouldn’t fret over the current ratios for UFC and WWE. After all, both businesses are in the same mold. And they both have considerable upside potential…
Similar to the NFL, WWE has long prospered by turning scripted wrestling matches into star-studded extravaganzas. And its blueprint is still going strong with its fanbase…
The two-day WrestleMania 39 event in early April drew 161,892 fans to SoFi Stadium in Los Angeles. And the $21.6 million gate was 27% higher than the company’s previous record.
More than 11 million hours of video were consumed over the two days. That was 42% higher than the previous year. And coverage of the event reached more than 1.2 billion fans in 180 countries.
Meanwhile, UFC started in 1993 as a fringe sport. Over time, more skilled and well-marketed fighters took it mainstream.
And in recent years, factors like ESPN sponsorship, digital streaming, and gambling turned it into a powerhouse. Today, the UFC reaches more than 700 million fans in 170 countries.
WWE and UFC operate compatible business models. So NewCo expects to realize between $50 million and $100 million in annual cost savings.
Better still, their media deals will soon come up for renewal…
UFC and WWE are still hot. They’re still growing. And they remain unique. So lucrative media-renewal deals should help propel NewCo’s valuation to new heights.
But today, the Power Gauge prefers the “here and now” angle for this merger…
Both Endeavor and WWE currently earn “neutral” ratings in our system. That tells us the Power Gauge is taking a cautious approach.
Sometimes, slower is better on Wall Street.
Good investing,
Marc Gerstein
