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Endeavor completes US$21bn UFC and WWE merger

Vice President: Sahil Kumar

Analysts: Luca Moretto, Abhishek Gopinath, Alessandro Bosco, Jason Tu


Deal Overview


Acquirer: Endeavor Group Holdings, Inc.

Acquiree: World Wrestling Entertainment, Inc. (WWE) and Ultimate Fighting Championship (UFC)

Deal Size: Approximately $21 billion

Buy-Side Advisors: Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, Raine Group, J.P. Morgan, Moelis & Company LLC

Sell-Side Advisors: Paul, Weiss, Rifkind, Wharton & Garrison LLP, Kirkland & Ellis LLP


On September 12th, Endeavor Group Holdings confirmed the finalisation of a historic merger between World Wrestling Entertainment (WWE) and Ultimate Fighting Championship (UFC), resulting in the formation of TKO Group Holdings (TKO). This transformative deal, valued at $21 billion, establishes Endeavor's majority control at 51%, with previous WWE shareholders retaining a 49% stake.


UFC is valued at an enterprise value worth $12.1 billion, while WWE stands at an enterprise value of $9.3 billion, valuing WWE shares at around $106 each (pre-dividend).Endeavor strategically integrated WWE's operations with UFC, merging two complementary entertainment giants, and reshaping the industry landscape by leveraging their extensive global fanbases and offerings.


Combined, UFC and WWE achieved a notable $2.4 billion in revenue by the end of 2022, with an impressive 10% annual growth rate since 2019, showcasing robust financial strength and growth potential.


Endeavor's successful management of UFC, driving over 2x Adjusted EBITDA growth since its late 2016 acquisition, highlights the immense value this merger brings.


Ariel Emanuel, Endeavor's CEO, envisions a global powerhouse aligned with industry evolution. Vincent K. McMahon, WWE's Executive Chairman, acknowledges substantial growth prospects and shareholder value.


The newly formed entity, helmed by Emanuel as CEO and McMahon as Executive Chairman aims to explore innovative content formats, optimise revenues, and forge strategic alliances. Mark Shapiro, serving as President and COO for both Endeavor and the new entity, will navigate integration and fuel growth initiatives.


With anticipated annualised cost synergies between $50 million to $100 million, the merger capitalises on Endeavor's success in commercial maximisation, epitomised by UFC's significant growth.


Finally note that UFC and WWE will each contribute around $150 million in cash, fortifying the new company's financial foundation for future innovation and growth.This merger marks a pivotal moment in sports and entertainment, symbolising the unified strength, vision, and potential of the newly created TKO Group Holdings.


Business Overview


Endeavor Group Holdings


Endeavor Group Holdings is a powerhouse in global entertainment and sports, initially starting as a talent agency in 1995. Now, it encompasses WME, representing diverse artists, IMG specialising in sports, fashion, and events, and TKO, the new entity born from the merger of previously owned UFC and WWE.


With a diverse business model, Endeavor excels in talent representation, sports advisory, event management, media production, and brand licensing. It strategically acquires industry leaders, expanding its influence. Endeavor's global footprint spans major entertainment hubs worldwide, enabling it to cater to diverse audiences and forge key partnerships.


Always innovating, Endeavor aims to pioneer entertainment's future, leveraging technology and collaborations. As a leader shaping the entertainment industry, it's committed to global expansion, synergy within its portfolio, and meeting evolving audience preferences.


TKO Group Holdings


TKO Group Holdings is a premier sports and entertainment conglomerate formed from the merger of UFC and WWE under Endeavor. It represents a $21+ billion enterprise, symbolising a global shift in sports entertainment. Led by Ariel Emanuel, TKO promises unparalleled experiences for over a billion fans worldwide, leveraging its extensive reach and impressive scale across 180 countries. With a robust focus on media rights, event operations, and innovative content creation, TKO stands as a dynamic force in live sports and entertainment.


Ultimate Fight Championship (UFC)


UFC, the Ultimate Fighting Championship, stands as the premier mixed martial arts organisation globally. With over 700 million fans and 228 million social media followers, it produces 40+ live events annually, broadcast to over 900 million TV households across 170+ countries. Under Endeavor's ownership, UFC's revenue surged, doubling over seven years, and exemplifying a lucrative growth trajectory. Renowned for its top-tier athlete roster and UFC FIGHT PASS, it continues to innovate in combat sports streaming. UFC's success underscores its position as a leading force in live sporting entertainment.


World Wrestling Entertainment (WWE)


World Wrestling Entertainment (WWE) epitomises the convergence of sports and entertainment, crafting scripted narratives that entertain a global audience. WWE's pinnacle event, Wrestle-Mania, stands as an iconic spectacle featuring scripted matches and larger-than-life characters, solidifying WWE's cultural eminence. Distributed to over 1 billion households in 25 languages through robust alliances with NBCUniversal, FOX Sports, TNT Sport, Sony India, and Rogers, WWE delivers TV-PG programming tailored for family-friendly audiences.


The acclaimed WWE Network, spanning 180+ countries, serves as a platform offering exclusive live events and an extensive video-on-demand library, significantly expanding WWE's digital footprint. The company, generating annual revenues approaching $1.3 billion, thrives on lucrative media rights, a testament to its innovative content creation and robust audience engagement strategies.


WWE's strategic partnership with NBCUniversal's Peacock in the U.S. represents a pivotal move, enhancing accessibility to premium WWE Network content and embracing the evolving landscape of digital transformation. Through a seamless fusion of athleticism and compelling storytelling, WWE sustains its global impact, bridging the gap between sports and entertainment to maintain a premier position in delivering family-friendly televised content that captivates diverse audiences worldwide.


Industry Overview


The live sports entertainment sector is a dynamic realm, merging athleticism, spectacle, and narrative, captivating audiences globally. Major components like mixed martial arts (MMA), professional wrestling, and various sporting events have evolved into integral facets of the broader sports and entertainment landscape.


Mixed Martial Arts (MMA), epitomised by the Ultimate Fighting Championship (UFC), orchestrates high-energy events featuring diverse fighting techniques, drawing a massive global following. Similarly, professional wrestling, notably represented by World Wrestling Entertainment (WWE), crafts scripted performances merging athleticism and storytelling, captivating a broad audience.


Critical to the success of live sports is engaging storytelling and creating gripping spectacles, captivating audiences through traditional television, digital streaming, and social media platforms. Revenue streams encompass media rights, ticket sales, merchandise, partnerships, and streaming services, contributing to financial viability and sustainability.


The industry continually evolves, driven by technological advancements, shifting audience preferences, and global market expansions. The vibrant sports teams market sees an uptick in M&A activities, direct-to-consumer sports offerings, and the emergence of niche sports gaining mainstream attention. Premier franchises and renowned brand names are up for sale, while additional leagues and teams explore direct-to-consumer services.


Amidst robust consumer demand and multiple streaming launches, market saturation becomes evident. With rising prices and inflationary pressures impacting consumer spending, a potential decline in media and entertainment expenditure looms, potentially affecting various sectors, from movie tickets to live events. Streaming churn observed in Q3 2022 suggests a potentially turbulent period ahead.


In parallel, media companies are proactively navigating the potential of the metaverse. While the excitement surrounding NFTs and the metaverse cooled temporarily in late 2022 due to macroeconomic factors, companies are investing in strategic planning, R&D, and consumer research, aiming to embrace an immersive digital landscape. These initiatives include exploring consumer behaviour within an interactive internet experience and leveraging blockchain-based assets like NFTs, reflecting a commitment to future innovation and revenue generation.


Financial analysis


Accretion/Dilution Analysis 


We also undertook an Accretion/Dilution analysis to see if the merger was value-adding over the long term. The analysis determines whether post-merger the EPS has increased or decreased. An increase in pro-forma EPS is regarded as an accretion, while a decrease is regarded as a dilution.


Since the Pro forma EPS is greater than the EPS before the merger the merger is accretive and there was an addition of shareholder value.


Comparable Companies Analysis



Precedent Transactions Analysis



To value TKO Group Holdings, we used two valuation methods based on multiples: a comparable company’s analysis and a precedent transactions analysis.


For the comparable companies, we picked six companies that do not necessarily operate in the sporting industry, but we focused more on Entertainment and Media companies, which have a more similar revenue structure. We calculated the average of Price/Sales, Price/Book, and P/E, which divided by the shares outstanding gave the implied value per share. The results were very conservative, suggesting that TKO Holdings Group was highly overrated, but we have to remember that these data come all from reports which are antecedent to the merger, so we do not exclude that in the next years the figures can increase a lot and bring up the valuation done using these multiples.


Using the same logic, we picked 6 precedent transactions closed between 2014 and 2021 and calculated the average Transaction Value/ Revenue, Transaction Value/ EBITDA and Equity Value/ Net Income. This analysis resulted in implied values per share closer to the values discounted by the market.


Deal Rationale and Synergies


To delve into the underlying rationales of the deal, it is important to remember that Mark Shapiro, the President, and COO of Endeavor, has always expressed a longstanding interest in WWE, believing that his group could bring substantial value to the wrestling entertainment company. Initial talks between the two companies reportedly commenced in early January 2023, prompted by WWE's formal exploration of a potential sale. Now that the deal is completed, the creation of TKO as a separate stock act as a strategic move aimed at attracting investors specifically interested in supporting a sports-focused venture. This approach allows investors to focus on the sports sector without being tied to the broader scope of Endeavor, whose diverse portfolio includes many art, fashion, and lifestyle event franchises.


Several key reasons underpinning this deal include:


1. Creating a Sports and Entertainment Powerhouse


Endeavor's acquisition of WWE is poised to create a formidable sports and entertainment powerhouse, mirroring the success witnessed with the integration of UFC under the Endeavor brand. Analysts widely anticipate substantial growth for WWE under Endeavor's guidance. Also, there's a consensus among industry leaders that Endeavor is unlikely to interfere with WWE's current creative process, and the focus will be on leveraging sponsorship and licensing opportunities to enhance WWE's profitability. Ari Emanuel, CEO of Endeavor, described the deal as a "once-in-a-lifetime opportunity" and is now planning to harness the company's expertise in media deals and sponsorships to propel the new entity's growth. Endeavor's track record of acquiring and successfully integrating over 20 companies, including the transformation of UFC into a significant asset within its portfolio, acts as a grant for the good execution of the merger. Endeavor's strategy is clear: they aim to replicate the success they've achieved for UFC by creating numerous avenues for WWE's future growth. The enterprise value of UFC has soared from US$4.1 billion to US$12.1 billion since Endeavor's acquisition in 2016, establishing itself as the central pillar in the firm's sports properties segment alongside Professional Bull Riders (PBR) and Euro league Basketball. Together, TKO is set to become a live sports and entertainment powerhouse, boasting a combined fan base exceeding a billion people and a market value surpassing $21 billion.


2. Financial Synergies and Growth


Anticipating a combined cost base of $1 billion (excluding COGS), the company foresees significant opportunities for improvement, with approximately 50% readily addressable. The merger is expected to yield synergies ranging from $50 to $100 million, primarily through the consolidation of back-office functions. These numbers act as a demonstration of Endeavor’s goal to optimise shareholder returns, drawing inspiration from its proven success with UFC. The appealing upward trajectory of WWE's financial performance is also a key aspect of this deal. In 2022, the wrestling giant achieved a record-breaking $1.3 billion in revenue, with a substantial $1 billion (more than 76%) coming from its media operations. Forecasts indicate a continuation of this impressive revenue growth in the current year. Mark Shapiro echoed this sentiment, describing the new company as a "highly attractive financial platform" expected to achieve double-digit revenue growth, maintain robust adjusted EBITDA margins, and generate scalable free cash flows.


3. Increased Market Influence


Endeavor's merger aims to position the company as a premier global destination for live entertainment, marking a substantial expansion of its footprint in the sports media market. The merger brings together an extensive portfolio of live televised content and merchandise capabilities, amplifying Endeavor's prominence in the industry. Also, WWE's impressive global presence plays a pivotal role in increasing market influence. With more than 200 events annually spanning 180 countries, WWE boasts a vast, young, and diverse fan base of more than 1.2 billion people, reaching more than one billion households. Moreover, projections indicate robust growth in global sports media and sponsorship revenues, with an expected CAGR of 8% and 9%, respectively. The benefits of this merger also extend across various revenue streams, including domestic and international media rights, ticket sales, event operations, sponsorship, licensing, and premium hospitality.


4. Cross-promotion potential


The merger paves the way for synergies in cross-promotion and collaboration, leveraging the extensive network of talent and media agencies within Endeavor to foster partnerships between WWE Superstars and UFC fighters. Potential crossovers in matches between wrestling and MMA athletes will not be expected, as UFC President Dana White was really careful with his declarations to the press, anticipating minimal possibilities for such cross-disciplinary events due to the substantial differences between the two sports. Nevertheless, the consolidation of both sports under Endeavor's umbrella provides a unique opportunity for cross-promotion, allowing the company to advertise events to a broader audience and enhance brand awareness across a global fan base. The merger is expected to unlock additional content, sponsorship, and licensing opportunities. Endeavor's reputation as a global sales force with deep connections to major brands positions it to capitalise on these opportunities. Moreover, the company has the unique capability to curate premium hospitality experiences for notable sports and music events, such as the NFL Super Bowl, The Olympics, and the NCAA Final Four, and can apply it to potential UFC and WWE events.


Risks


1. Market Reaction and Shareholder Value


Following the merger announcement, both WWE and Endeavor witnessed a minor decline in their stock prices. The unexpected all-stock deal structure surprised investors, leading to a temporary dip in the shares of both companies. This market response has prompted questions about the overall sentiment within the market regarding the merger. Also, public speculation has emerged, particularly concerning the potential resurgence of pay-per-view (PPV) events for wrestling and its potential impact on the fan base and revenue streams. This speculation is fuelled by the fact that, as part of the deal, Endeavor will acquire WWE Network's assets (a subscription streaming service). These assets will be integrated into ESPN+, owned by Disney. This strategic move aims to enrich ESPN+ with additional content, potentially attracting more subscribers and generating increased revenue. Overall, the market's reaction suggests ongoing scrutiny regarding the perceived implications of the merger.


2. Reputational risks:


The WWE-UFC merger presents reputational risks associated with the key figures involved. Vince McMahon, WWE's founder and designated executive chairman of the newly formed company, TKO, has faced sexual harassment allegations, sparking concerns among observers. Furthermore, WWE has grappled with allegations of retaliation and racism, spotlighting potential liabilities and risks to public opinion. Given these concerns, the decision to proceed with the merger is a clear signal of Endeavor's belief that the anticipated benefits will outweigh the potential reputational risks. The strategic move to appoint McMahon as executive chairman, with limited day-to-day involvement, seems like a calculated step aimed at mitigating emerging reputational risks. Also, an interesting fact regarding TKO's reputation is that this merger marked the first time that WWE has not been majority-controlled by the McMahon family, which had founded the company and owned it for more than 70 years.


3. Impact on Major Streaming Companies:


The deal will likely have an impact on major streaming companies: currently, WWE streams on NBCUniversal's Peacock, but the expiration of their deal in 2026 opens the door for other streaming entities to bid on the rights. This potential alteration in media partnerships can reshape the landscape of sports entertainment broadcasting, providing fresh opportunities for companies to connect with their audiences on new platforms. The growing influence of TKO in negotiating media rights may also lead to a wider reconfiguration of the competitive dynamics in the fighting sports content distribution market, with implications for both television networks and streaming platforms.


Conclusions


As we had the opportunity to understand, the merger between WWE and UFC has given rise to a new powerhouse in sports and entertainment, under the brand TKO. Although it's unlikely that athletes from UFC and WWE will compete directly on each other's platforms, there is the potential for various collaborations between the two organisations, even if not in the form of actual matches. With Endeavor and existing WWE shareholders holding a controlling interest in TKO, the core products of both UFC and WWE are expected to undergo minimal changes. Nevertheless, the merger offers a unique opportunity for heightened market influence, cross-promotion, and visibility for both brands. As TKO is consolidating its presence in the industry, fans can look forward to exciting developments, cross-events, and collaborations between the brands of UFC and WWE in the next few years. Finally, as we could see from the previous analysis, the Pro Forma EPS is greater than the EPS before the merger, so this merger is expected to be accretive, with additional creation of shareholder value, along with great opportunities for the public.

 

References



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