WWE - Endeavor Group: Unleashing UFC

2023-04-04 06:45:13 ET

Summary

• Endeavor Group agrees to a deal with WWE to combine their UFC business into a new public entity.
• NewCo. will trade under the ticker "TKO" and only trades with a proposed market cap of $13 billion now.
• The new stock only trades at ~12x '23 adjusted EBITDA targets.

Over the weekend, Endeavor Group ( EDR ) announced a deal with World Wrestling Entertainment ( WWE ) for a premium valuation. The real news is the planned formation of a new public company with the combination of the UFC and WWE. My investment thesis is ultra Bullish on the valuation of the stock with the UFC currently buried inside Endeavor.

Deal Details

The deal is a little confusing considering Endeavor and WWE are combining assets, with Endeavor contributing the UFC at an enterprise value of $12.1 billion and agreed to terms with WWE at a valuation of $9.3 billion. WWE will be the parent company of the new stock, but Endeavor will control 51% of the business.

WWE only trades with a market cap of $6.6 billion following the deal announcement as the value assigned by Endeavor makes no practical difference to the stock. The stock didn't even trade higher today despite a listed valuation for WWE of $105.98 per share.

The prime reason is that WWE shareholders aren't getting anything tangible as part of the deal, such as a specified cash payment. WWE shares will be converted into the new company listed on the NYSE under the symbol "TKO". The only gain will occur if the stock market decides NewCo. is worth more than what amounts to a roughly $13 billion market cap currently based on the muted market reaction.

The combined company will have a cash balance of $150 million after some excess cash is paid via a dividend to existing shareholders.

Unleashing The UFC

Right now, an investor wanting to own UFC has to purchase shares in Endeavor Group involved in various entertainment endeavors outside of the UFC. The stock only has a market cap of $6.6 billion despite the deal value of UFC with an equity value of $9.4 billion.

Investors now get the opportunity to either buy Endeavor with a 51% position in the combined UFC/WWE business or to buy WWE and obtain an investment focused on owning these sports properties. Either route is likely a good way to unlock value for an investor.

Going the WWE route, investors get a combined business with $1.0 billion in adjusted EBITDA and $2.5 billion in revenues back in 2022. Both sports platforms have about 1 billion in household reach with a combined fan base of nearly 2 billion (though a lot of fans might cross).

Remember, an investor gets ownership of both sports and entertainment leagues while individual franchises in the NFL or NBA have valuations reaching $8 billion alone. In total, Forbes lists the top 50 most valuable sports teams as worth $223 billion with an average value of nearly $4.5 billion.

As an example, the Dallas Cowboys in the NFL alone is valued at $8 billion while the New York Yankees of MLB is worth $6 billion. Random NFL teams like the Tennessee Titans are valued at $3.5 billion in a sign of where the UFC is probably vastly undervalued as part of Endeavor now.

NewCo. has a $13 billion valuation and $1 billion in adjusted EBITDA last year. At just 10% growth, the combined entire would have $1.1 billion in EBITDA with the stock only trading at 12x targets.

Investors can choose to go the WWE route and own a more direct position, or participate in Endeavor and own 51% of the business worth vastly the same amount as the whole company. Investors taking the Endeavor route get a robust business with over $5 billion in annual revenues, though net debt is above $4 billion, placing the enterprise value at nearly $11 billion. The stock currently trades with an EV/EBITDA multiple of below 10x.

Takeaway

The key investor takeaway is that Endeavor Group is far too cheap here. The UFC transaction with WWE should unleash some value in the sports league. Investors should win either route, though the public markets haven't always valued sports teams and leagues in a similar manner to the private markets, rewarding NFL and MLB franchises with very rich valuations.

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