World Wrestling Entertainment Inc. (WWE, Financial) has been seeking a buyer for months as executive chairman and majority shareholder Vince McMahon looks to get the best deal before the company’s media rights for "Raw" and "Smackdown" expire in October 2024. The wrestling giant reportedly had several suitors, but on Monday, it finally announced that it has agreed to merge with UFC’s parent company Endeavor Group Holdings Inc. (EDR, Financial) in a deal that values it at $9.3 billion.
Even though the deal values WWE at a significant premium to its share price as of the time of the announcement, shares took a hit of 4% on Monday, while Endeavor dove over 6%. The deal is expected to close sometime in the second half of 2023.
The negative market perception stands in stark contrast to the merging companies’ enthusiasm for the deal. They value the combined company’s enterprise value at $21 billion, even though WWE’s enterprise value is $6.96 billion and Endeavor’s is $11.79 billion as of this writing.
The merger will create a sports and entertainment powerhouse from WWE and UFC that should be able to take advantage of key synergies to up the number of fights and expand original content, but the media rights for "Raw" and "Smackdown" will need to be renegotiated amid an unfavorable macroeconomic environment, and the valuation ratios for both companies are arguably overheated already. Can this merger truly unlock the value that the companies claim, or will it be a trigger for the market to decide it is still overvalued after all?
Growth-focused synergies
McMahon is set to take the executive chairman role in the combined company, while Endeavor’s CEO Ari Emanuel will likely take over the CEO role. Endeavor shareholders will take a 51% controlling interest in the combined company, while WWE shareholders will get the other 49%. Dana White will continue as president of UFC, while Nick Khan will be president of WWE.
In a statement on Monday, McMahon highlighted some of company’s expected growth synergies going forward, including maximizing the value of combined media rights, enhancing sponsorship monetization, developing new forms of content and looking for further value-added acquisitions.
The increased ability to get more from sponsorships seems promising, though fans of WWE and UFC are divided on new forms of content; some are excited about the possibility of new content and crossover fights, while others pledge to stop watching if the boat is rocked too much. Wrestling and MMA are different fighting styles, after all, so many fans might not want to see them mix.
As for maximizing the value of combined media rights, it seems likely that price increases could be in the cards, which could be a double-edged sword. There may be some friction if fans feel like they are being forced to pay for extra content they do not even want due to potential new introductions like combined subscription packages.
“This is a rare opportunity to create a global live sports and entertainment pureplay built for where the industry is headed,” Emanuel said. “For decades, Vince and his team have demonstrated an incredible track record of innovation and shareholder value creation, and we are confident that Endeavor can deliver significant additional value for shareholders by bringing UFC and WWE together.”
Making sense of the price tag
WWE has undeniably done well for itself over the years. The business has crated solid shareholder value with a return on invested capital that consistently exceeds its weighted average cost of capital. Over the past three years, it has grown its revenue per share at an annual rate of 11.2% and its earnings per share at an annual rate of 39.1%.
This solid growth has spurred a price-earnings ratio of 38.17, which is a little on the high side but still lower than the company’s historical median of 51.24. According to the GuruFocus reverse discounted cash flow model, the company will need to continue growing its earnings per share by 21.52% for the next decade to be worth its current valuation, meaning it would need to book even faster growth to justify the $9.3 billion valuation the merger deal puts on it.
Endeavor has a more complicated history and a more diverse business model, including entertainment giant WME, events and media company IMG and various sports and fashion holdings, which is perhaps why the deal values it more in line with its enterprise value at $12.1 billion. In 2022, UFC brought in about $1.3 billion of the company’s $5.2 billion in revenue. The company has already made six acquisitions in the past five years, with its largest being the $4 billion acquisition of UFC in 2016.
Endeavor’s current price-earnings ratio is on the high side at 45.04. However, its forward price-earnings ratio is just 15.48, based on 2023 earnings estimates from Morningstar (MORN, Financial). If the company can meet expectations, it may be fairly valued based on the merger’s estimates.
Takeaway
Overall, I can see why WWE and Endeavor value their deal at $21 billion, but I do not think the market will give that kind of value to the stocks just yet. Endeavor’s valuation is rooted in its business trajectory for this year, while WWE’s valuation is higher on the back of its strong growth and the hopes it can help propel similar growth rates for UFC (though WWE brought in similar revenue to UFC last year, so they are starting at about the same place now). We will have to wait and see what changes the combined company plans to make before it is safe to speculate on how said changes could drive growth.
