EDR - Endeavor Group: Spotlight On Capital Return And UFC-WWE Merger

2023-06-16 04:52:33 ET

Summary

• Endeavor Group has recently disclosed its intention to execute on a $300 million share buyback and initiate quarterly dividend payouts of $25 million.
• EDR has previously reached a deal with World Wrestling Entertainment to merge UFC and WWE, and the transaction is expected to have a favorable impact on Endeavor in many ways.
• I award a Buy rating to EDR; Endeavor Group's valuations are attractive and there are drivers like capital return and the UFC-WWE deal to push EDR's share price up.

Elevator Pitch

My investment rating for Endeavor Group Holdings, Inc. ( EDR ) stock is a Buy. I have a favorable opinion of EDR stock, considering the company's recent shareholder capital return moves and the potential benefits of the merger between UFC and World Wrestling Entertainment, Inc. ( WWE ).

Company Description

EDR calls itself "a global sports and entertainment company" engaged in activities like "talent representation, sports operations & advisory, event & experiences management" in its media releases .

Endeavor Group's Four Business Segments

The Events, Experiences & Rights, Owned Sports Properties, Representation, Sports Data & Technology segments contributed 50%, 22%, 22%, and 6% of EDR's Q1 2023 revenue, respectively. As disclosed in its FY 2022 10-K filing , Endeavor Group derived 76%, 20%, and 4% of its top line from the US, the UK, and other markets, respectively for the most recent fiscal year.

Shareholder Capital Return

Last month, Endeavor Group announced that it will "commence an event-driven share repurchase of up to $300 million" and "begin making quarterly cash dividend payments" of $25 million beginning in Q3 2023.

There are two key factors that drove EDR to make a one-off $300 million buyback of its own shares. One factor is that Endeavor Group had entered into a deal in April this year to divest its entire interest in IMG Academy based on a $1.25 billion enterprise valuation, and the sales proceeds will help to fund EDR's proposed share buybacks. The other factor is that EDR has successfully reduced the company's net leverage (net debt-to-EBITDA) ratio from around 8 times at the time of its public listing ( April 2021 ) to 3.9 times as of end-Q1 2023. The improved financial position gives Endeavor Group the financial capacity to execute on share repurchases.

Separately, Endeavor Group will start to distribute dividends for the first time since its April 2021 IPO as mentioned above. Based on EDR's initial quarterly dividend guidance, the Wall Street analysts estimate that Endeavor Group's forward FY 2024 dividend yield will be 0.4% as per S&P Capital IQ's consensus data. Although Endeavor Group's dividend yield doesn't seem very enticing, the initiation of dividends could still be a key re-rating catalyst for EDR. At the company's Q1 2023 earnings briefing in mid-May, EDR stressed that "the dividend brings us a new group of shareholders to look at the company."

In a nutshell, I view EDR's return of excess capital to shareholders via both buybacks and dividends in a positive light.

Whenever any company does a major asset or business sales, investors are typically worried that the company will either hoard cash or spend most of the divestment proceeds on mergers & acquisitions that are potentially value-destructive. As such, Endeavor Group's decision to distribute part of the proceeds from the sale of IMG Academy to shareholder in the form of share repurchases suggests that it has a balanced approach towards capital allocation with an emphasis on both capital return and capital investment.

Also, Endeavor Group is now in a good position to attract new individual and institutional investors who don't invest in non-dividend paying companies, following its move to initiate dividend distributions.

Merger Of UFC And WWE

Earlier in April 2023, Endeavor Group revealed that it had signed a deal with World Wrestling Entertainment, Inc. to "form a new, publicly listed company consisting of two iconic, complementary, global sports and entertainment brands: UFC and WWE." EDR noted at its first quarter results call that the merged entity will become a "new publicly listed company under the ticker TKO", which Endeavor Group will have a 51% stake.

I think that this merger between UFC and WWE will have multiple benefits for Endeavor Group.

Firstly, there are substantial cost synergies associated with the UFC-WWE deal. At its April 3, 2023 investor call discussing about this transaction, Endeavor Group guided for $50-$100 million of "long-term annualized run rate net operating synergies." On top of that, EDR highlighted at the early-April investor briefing that UFC and WWE as a whole have a "cost base of approximately $1 billion, excluding direct operating costs", which it thinks can be significantly reduced.

Secondly, the merged entity TKO is expected to have greater bargaining power than either WWE or UFC on a stand-alone basis. As a reference, the total fan base for UFC and WWE combined is around 1.9 billion as revealed at Endeavor Group's April 3 investor briefing. As such, TKO should be able to negotiate for more rewarding media distribution deals going forward.

Thirdly, EDR's financial leverage is expected to decrease with the completion of the combination of WWE and UFC, and this offers the company greater financial flexibility to potentially distribute a greater proportion of excess capital to its shareholders. Specifically, Endeavor Group mentioned at the company's Q1 earnings call in May this year that its net debt-to-EBITDA or net leverage metric is estimated to decline further (from 3.9 times as of end-Q1 2023) to "the mid-2s" on a pro-forma basis after the UFC-WWE merger is concluded in the second half of this year.

Closing Thoughts

EDR trades at a consensus forward FY 2024 EV/EBITDA multiple of 6.8 times (source: S&P Capital IQ ) now, which is significantly below its all-time historical mean EV/EBITDA ratio of 12.1 times. Endeavor Group's current valuations are appealing, and positives associated with its capital return initiatives and the UFC-WWE combination are expected to drive an expansion of EDR's valuation multiples in the future. This explains my Buy rating for Endeavor Group.

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