WWE - WWE And Endeavor Group's UFC Could Be A Powerful Combination

2023-06-16 10:25:14 ET

Summary

• UFC and WWE are set to merge in H2 2023, forming TKO Group Holding, with potential for cross-promotions and collaboration in building new stars.
• WWE's expertise in marketing and entertainment could help UFC fighters improve their brand and media attention, while Endeavor Group could help WWE stars with exposure.
• Long-term investors may find the merger beneficial, but a wait-and-see approach is recommended to observe the development of synergies and cash flows.

Thesis

The synergy effects of mergers are often overestimated, and everything sounds plausible and logical before the merger, but the reality is often sobering after a few years. However, Endeavor (EDR), owner of the UFC, and WWE (WWE) have worked together in the past, with some of the biggest stars such as Brock Lesnar and Ronda Rousey moving between the two organizations. And in general, I think the two are more similar than many people think, because the fighting business is also primarily entertainment-driven. Boring fighters don't sell tickets, and big mouths who can put on a show at press conferences are very valuable. And this is where WWE excels, they know how to market their fighters and work the mic.

Some of the current UFC fighters could really benefit from working with WWE writers to build a brand or improve their speeches and out-of-ring performances. After all, at the end of the day, what counts is how much media attention and ticket sales they generate.

And the UFC has some very talented fighters right now, but they need the next Connor McGregor and I think the WWE can help them with that.

Analysis

In H2 2023, the merger between UFC and WWE will take place as they form a new company, TKO Group Holding, which will trade under the new ticker TKO. Endeavor Group will own 51% of the new company, with the remaining 49% owned by WWE shareholders. The CEO of TKO will be Ari Emanuel and the Executive Chairman will be Vince McMahon. Dana White and Nick Khan will remain in their positions as presidents of the UFC and WWE.

And I think it is a good partnership because they complement each other and have a lot of potential for the future in terms of cross-promotions and much more. Particularly in the heavyweight division, where the UFC is lacking in talent, WWE could help them out with some high profile wrestlers who could potentially be marketed well. This has worked very well in the case of Brock Lesnar, who was a big draw in terms of ticket sales.

Because if you look at the history of martial arts, the biggest events have always had a well-spoken, larger-than-life fighter on one side who could really sell the fights. Someone like Floyd Mayweather, with his arrogant Money Mayweather persona and his undefeated record, had people paying for his fights because they hoped he would lose. Or Mike Tyson, who they made out to be the baddest man on the planet, where even his opponents were afraid of him. On the other hand, there are fighters like Naoya Inoue, who is considered by some to be the best pound-for-pound boxer at the moment, but he is relatively unknown because he cannot get the media attention and make the headlines.

And the UFC knows that it needs these polarizing personalities, as they have had great success with the attention that Rousey and Connor McGregor have received. However, Connor McGregor is no longer the youngest and there is a possibility that his injuries will prevent him from competing at the highest level. But the current Ultimate Fighter season with him is sure to draw attention.

But who will come after him? Adesanya versus Pereira was a nice storyline because of their Glory past, but I cannot see them getting as big as Connor. Khamzat Chimaev, Sean O'Malley and Paddy Pimblett are some of the prospects who could be stars in the future. Khmazat in particular has the potential as he is a very entertaining fighter who tries to put on a good show when he fights.

This is where the WWE comes in. They have a long track record of building stars. People like The Rock, now more commonly known as Dwayne Johnson, Dave Bautista or John Cena, are the product of the WWE. And if you want to make it in the wrestling business, you have to be very good at public speaking and acting. And those skills could really help the UFC promote their fighters and work with the WWE writers to create interesting storylines. Because at the end of the day, it is all entertainment.

And the Endeavor Group with its Hollywood talent agency could also help the WWE stars to build their brands and get them more media exposure and maybe help some of them go the Dwayne Johnson route.

In general, WWE is on a good run at the moment as they have managed to get Logan Paul and Bad Bunny to work with them. And both of them are two of the biggest stars in the world right now. In addition, WWE has announced a new multi-year partnership with Twitch that will really help them get even more exposure.

Wrestlemania earlier this year also had a record attendance of 161,000 fans and 500 million views across all media channels, and the Royal Rumble was the highest grossing Royal Rumble in the company's history. Plus, the merger with the UFC will give them more leverage when it comes to negotiating the renewal of their TV rights. So the business outlook for WWE looks good. And if Connor McGregor does some WWE shows, you can be sure it will be fun and get a lot of media attention. His personality would be perfect for the wrestling industry because he knows how to talk. However, if we look at the pay-per-view buy rate , we see that Connor McGregor is the biggest UFC star by a large margin and he has had a big part in the success of the UFC in recent years.

The UFC depends on his star power and they need a replacement. Masvidal, Lesnar and Rousey, who were other big draws, have all retired from the UFC. And champions like Jon Jones, Adesanya, Makhachev and Volkanovski are all over 30. So the future potential of the UFC is heavily dependent on young, exciting fighters who have the superstar factor.

Financials

WWE is a strong business with an EBIT margin of 21% and a strong return on equity of 33.64%. Endeavour, on the other hand, shines with an FCF margin of 11.60% and a decent EBIT margin of 10%. If and how these financials will improve post-merger, no one can say for sure, so I believe all the fancy spreadsheet models people use to try to predict post-merger financials arguably only give investors a false sense of security. Mergers are always risky and the expected synergies and cost savings are often overstated.

However, both companies are FCF positive and therefore the new company should be FCF positive from the outset, resulting in excess capital to invest in value-creating activities. I hope they will invest in growth opportunities now and leave things like dividends or share buybacks for later. Together, they should also have greater bargaining power when it comes to renewing TV rights and negotiating sponsorship deals.

If you look at both companies individually, I think WWE is the more attractive company in terms of the quality that it has. So if the merger fails for whatever reason and the share prices fall, WWE could be an attractive investment depending on the price. If this deal does not go through, WWE shares are likely to fall back to where they were before all the M&A talk, which would give them a downside of around 40%. But there are no signs at present that the deal will not go through.

If we look at the valuations of both companies, we can clearly see that WWE became more expensive to close the arbitrage opportunity, but that even before that, both were valued at 20x EV / EBIT, which was clearly not cheap given their growth opportunities. One could even argue that WWE is being priced a little higher than it would be worth on the open market, as the proposed price is clearly at a premium to WWE's historical valuation, which was closer to an EV/EBIT of around 16x - 18x, which is clearly more fair given the quality of the business and its growth opportunities.

Conclusion

Building new stars is the most important task for both organizations. From a competitive standpoint, WWE and UFC are the clear number one in their respective sports. But with Bellator and One, there are serious competitors for the UFC. But I think with the merger, the promotional opportunities will really help the UFC. However, I would not buy shares at the moment as I would wait a few quarters to see how the synergies and cash flows develop.

Earlier this year, when the shares were trading in the $80s, it would have been a good arbitrage opportunity as the per share value of the WWE shares in the transaction is around $106, but that opportunity is now gone. Overall, this could be a good bet for long-term investors as both companies have good fundamentals and are market leaders with a competitive advantage. However, to reduce risk, I would take a wait-and-see approach to see how the financials of the new TKO Group Holding look after the first few months.

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