WWE - World Wrestling Entertainment: Riding Media Rights Wave

2023-06-15 17:57:32 ET

Summary

• World Wrestling Entertainment, Inc. continues working towards closing the deal with Endeavor Holdings to merger with UFC.
• The company is negotiating U.S. media rights deals concluding in late 2024 with massive upside potential.
• The stock isn't cheap after this rally, but World Wrestling Entertainment should continue trading at a premium valuation due to the unique assets and media rights catalysts.

Following the announced deal to merge with UFC and the Endeavor Group Holdings ( EDR ), World Wrestling Entertainment, Inc. ( WWE ) has seen a strong rally. The proposed new entertainment entity focused on live sports is probably set for a pause after the large rally heading into the merger deal. My investment thesis remains Bullish on the stock due to the major media rights catalyst.

Media Rights Catalyst

WWE had rallied from a low below $60 in the last year to now trade above $100. The stock has market cap of ~$9 billion now and the company lists a merger price of $106.

The global entertainment company guided to an OBIDA target of ~$400 million for the year. The stock now trades at 22.5x the OBIDA target in a normally full valuation.

Importantly, the requirements to complete the merger with the UFC and the integration of the business will take time. The stock isn't likely to rally much from here, as this process is ongoing until the media rights deals are announced.

A big part of the merger is for the new TKO to have a strong negotiating position with prime live entertainment properties to pitch to media partners. Right now, WWE is in exclusive negotiations with Fox Corporation ( FOX ) and NBCU, owned by Comcast Corporation ( CMCSA ), with these media companies airing SmackDown on Fox and Monday Night Raw on USA Network through October 2024.

The company signed a major media rights deal five years ago with these media companies for a value of $2.35 billion plus a $1 billion deal with Peacock, owned by Comcast, for the WWE Network. UFC already has a relationship with ESPN, owned by Disney ( DIS ), making some media analysts think WWE could end up there.

Ultimately though, the upside from the stock will come from these much higher U.S. media rights deals. As reported by the New York Post , Comcast pays $265 million per year to put WWE Raw on USA Network and Fox pays $205 million per year for WWE SmackDown.

The amounts are paltry compared to the major sports leagues. Sports Business Journal estimates the combined media rights deals for the NFL were a massive $110 billion. WWE has over 1 billion fans and the ability to offer content on a year-round basis, while the NFL and other sports leagues are only on for half the year.

Ton Maglio of IndieWire suggests CEO Nick Khan is only looking for a 50% increase in media rights with a 1.5x increase, while other outlets are reporting a 150% increase . On a 50% increase, the current SmackDown deal of $1.0 billion turns into $1.5 billion, or ~$300 million annually versus $200 million now.

As mentioned above, the NFL media rights deals back in 20201 were worth ~$10 billion per year , nearly doubling previous contract values. WWE only produced a total of $1 billion in media-related revenues in 2022.

Right now, WWE collects about $150 in quarterly content rights fees out of a total of $205 million in quarterly fees. The WWE Network generates about $50 million in quarterly revenues included in those amounts.

In total, the new TKO only produced $2.4 billion in 2022 revenues. The businesses even generated ~25% of revenues from items outside media rights, highlighting the potential upside in revenues.

Relatively Cheap

Assuming the deal gets done, the new TKO has an EV in the $21 billion range. The combined company produced $1.0 billion in adjusted EBITDA for 2022 and cost synergies will produce saving in the $50 to $100 million range.

The stock of the new entity will trade at below 20x adjusted EBITDA targets for the year. For this reason, WWE isn't likely to rally much for the next few months heading into the merger close.

Ultimately though, the media rights deals have massive upside potential with WWE signing deals for late 2024 and the UFC locked into exclusive deals until 2025. If WWE signs some large boosts to media rights, the stock should start rallying prior to the revenues arriving.

Takeaway

The key investor takeaway is that World Wrestling Entertainment, Inc. could be poised for a lengthy sideways trading period, but ultimately the stock should see upside from expected massive increases in media rights. Even the projected amounts don't appear to fully value the WWE and UFC fan bases compared to other sports leagues supporting future upside potential.

World Wrestling Entertainment, Inc. stock isn't exactly cheap here, but WWE stock should trade at a premium valuation due to the unique assets and synergy potential of the deal to combine with the UFC.

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