WWE-Endeavor tie-up offers investors a sporting chance

News has emerged that Endeavor Group Holdings (US:EDR) is buying a majority stake in World Wrestling Entertainment (US:WWE) in a bid to create a $21.4bn (£17.5bn) business. Endeavor (formerly known as William Morris Endeavor and WME-IMG) already owns the Ultimate Fighting Championship and will hold a 51 per cent controlling interest in the new entity, while existing WWE shareholders will hold the remainder. The arrangement places an enterprise value of $12.1bn on UFC and $9.3bn on WWE.

Since going public in 2021, Endeavor has looked to extend the global reach of its sporting events business, so the deal makes strategic sense, especially given the worldwide popularity of WWE. The new publicly traded entity’s combined sales will be in the region of $2.4bn and projections are for an estimated $50mn-$100mn in annualised cost synergies. More importantly, the deal will enable management to optimise sponsorship and media rights arrangements, along with the development of new content streams.

Unfortunately, there are relatively few options in the UK market if you’re looking to tap into the world of sports/entertainment. History suggests that our US cousins have been more adept at the commercial exploitation of sports, the Premier League notwithstanding. Indeed, there is no effective demarcation between sports and entertainment in the US, thereby clearing the way for the formation of a broad-based talent and media agency group such as Endeavor. This non-distinction may help to explain why the major US sports leagues are generally in better financial shape than their UK counterparts.

The major US leagues can obviously exploit a much larger marketplace, but the widely employed franchise model reflects the business-driven approach to sports management in the US. By contrast, the ongoing financial struggles faced by sports clubs this side of the Atlantic could suggest that the amateur ethos has yet to be fully abandoned.

The WWE/UFC tie-up will trade under the “TKO” ticker, but for now it may be worth examining how Endeavor Group has been faring on a standalone basis. Within its DNA, the group combines strands from the William Morris Agency and IMG, the latter company founded by Mark McCormack, who is widely acknowledged as the most influential figure ever in the field of sports marketing. The group does more than simply represent talent nowadays, having built a co-ordinated offering including event-related revenue, pay-for-view contracts, media rights, and live events – to name but a few.

The table below gives some indication as to how the group was negatively impacted by the pandemic, with net income falling to –$297mn in 2021. By the fourth quarter of that year, its first as a public company, Endeavor was benefiting from increased attendance at live events and “continued heightened demand for premium content”, although its initial public offering (IPO) in April 2021was rather better for insiders than it was for investors. The stock price clicked into reverse over the next 12 months, but partly retraced thereafter, hitting a positive technical signal in March.

The stock now trades at 19 times forward adjusted earnings and at a 25 discount to the consensus target. The projected increase in free cash flow should help to boost sentiment going forward, while a relatively high degree of insider holdings (36.8 per cent) has the theoretical benefit of aligning management decisions with the interests of shareholders. Even so, this is less of a turnaround story than it is a cautionary tale of IPO timing. Perhaps the TKO float warrants closer inspection given that US indices have returned to more realistic levels.