UFC Sale Implications On WWE Valuation, WME - WWE Confusion, Lessons Learned

Now that UFC has been sold in a $4 billion deal to coalition comprised of talent agency WME-IMG, Silver Lake Partners, Kohlberg Kravis Roberts and MSD Capital, many wonder whether the transaction has any larger ramifications for the pro-wrestling world. Namely, will "the most expensive transaction for an organization in sports history" (ESPN) impact the publicly traded World Wrestling Entertainment organization?

On Monday morning, WWE's stock price jumped up. By the end of the day, the stock price had rose 4% and closed the day at $20.46. This marked the first time in more than eight months that shares of World Wrestling Entertainment traded at a price above twenty dollars.

Source: $WWE on Google Finance

But why would the sale of the world's largest mixed martial arts company impact the world's largest professional wrestling company?

There's always the possibility of confusion. WME-IMG was formed from the merger of the William Morris Agency and the Endeavor Agency in 2009 and the acquisition of the International Management Group in December 2013. It appears the similarity in initials (WME/WWE) may have caused some confusion in the marketplace after the UFC sale was formally announced.

Source: @mattfarmer93

The two companies have a lot in common. WWE is a public company controlled by the McMahon family through preferential voting shares. UFC had been a private company controlled by majority ownership of the Fertitta brothers. Both companies promote live entertainment events with exclusive talent; both companies distribute their content through a variety of platforms (PPV, web, over-the-top streaming services and television contracts) to monetize their events; both companies do big business through merchandising and licensing their top stars; both companies are looking to international markets for new growth opportunities.

Analysts who compared the financials have always been quick to note the similarities in financials between both organizations. For instance, Wells Fargo analyst Eric Katz recently compared the companies after the UFC sales announcement.

? UFC revenue was roughly $600 million in 2015 compared to WWE revenue of about $659 million that same year.
? According to the May 16, 2016 Wrestling Observer Newsletter (subscription required), financial information provided by Goldman Sachs for the UFC sale suggested UFC's 2015 EBITDA (earnings before interest, taxes, depreciation and amortization) was between $200 million and $250 million.
? Meanwhile, WWE's 2015 OIBDA (operating income before depreciation and amortization) was about $62 million.
? Market cap for WWE is only $1.5 billion while the UFC was just sold for $4 billion.

One large difference between WWE and UFC is their use of debt. WWE had about $22 million debt balance in 2015 which came from financing for their "2007 Bombardier Global 5000 aircraft and related refurbishments". Meanwhile, UFC has taken on large loans in excess of $400 million.

source: bloodyelbow.com

When asked at investment conferences about the UFC valuation, WWE has always quick to dismiss the notion that WWE considers UFC as competition.

In August 2014, investors asked Executive Vice President Paul Levesque (Triple H) about UFC as competition, "They aren't really a competitor to us and I explain this to our talent this way in the Performance Center and every time I say it people will say to me: 'Oh, that made it very clear for me: people like UFC, they like boxing, but it's completely different from what we are.'"

Yet, in the WWE booking contracts with their talent, it's clearly laid out that wrestlers cannot leave the company just to become talent for other pro-wrestling companies nor to become MMA fighters.

For instance, in Stephanie McMahon's talent contract (made public in SEC filing since she is an officer for the company), section 11.3b states:

(b) Upon expiration or termination of this Agreement by PROMOTER pursuant to Section 12.1, WRESTLER shall not work, appear, or perform in any capacity for any professional wrestling, sports entertainment, mixed martial arts and/or ultimate fighting organization, promotion or entity not owned or controlled by PROMOTER (or any affiliated or subsidiary company thereof) in the United States for a period of up to one (1) year from the date of such expiration or termination, as specified by PROMOTER in the notice of termination; provided, however, that if no lesser period is specified by PROMOTER in the notice of termination, such period shall be one (1) year.

Here's how WWE frames the topic of "competition" in the 2015 WWE Annual report:

While we believe that we have a loyal fan base, the entertainment industry is highly competitive and subject to fluctuations in popularity, which are not easy to predict. For our live, television, WWE Network, pay-per-view and movie audiences, we face competition from professional and college sports, other live, filmed, televised and streamed entertainment, and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise. We will face increased competition from websites and mobile and other internet connected apps delivering paid and free content, as streamed media offerings continue to expand. Many companies with whom we compete have greater financial resources than we do.

Still, it's clear from the recent promotion of Brock Lesnar's success at UFC 200 or the appearance of Ronda Rousey at WrestleMania 31 that World Wrestling Entertainment is happy to use UFC stars for WWE promotion whenever the situation suits them. WWE was reported to be very interested in bringing in UFC fighter and Dancing with the Stars contestant Paige VanZant to SummerSlam (though the deal did not happen as VanZant chose a UFC fight on August 27 instead).

Inevitably, investors will be asking WWE about the ramifications of the UFC valuation at the next quarterly conference call (expected late July/early August to discuss Q2 2016 results). WWE tends to avoid questions about UFC success. Recently at the Needham Emerging Technology Conference in May 2016, WWE Chief Strategy and Chief Financial Officer George Barrios did say that the UFC acquisition at then-rumored $4 billion price-tag would "keep amplifying the value of content."

The key to the UFC deal is that the WME-IMG consortium is taking control of the company. While Dana White will still run day-to-day operations, ultimately there's a new boss in town. The enormous valuation for UFC is predicated on the notion that this the new ownership structure can control the future of the mixed martial arts juggernaut.

Meanwhile, although WWE is a public company, Vince McMahon fully controls the company "through the beneficial ownership of a substantial majority of our Class B common stock". Class B shares are entitled to ten votes (compared to normal Class A shares with only one vote) and can only be owned by "Vincent McMahon, Linda McMahon or any descendant of either of them".

There cannot be a hostile takeover of WWE. It would have to be a negotiated sale and it's highly questionable whether the Vince McMahon would ever allow the WWE to exist without the McMahon family firmly at the helm. Winning over the irascible CEO would require not only a lot of money, but also a partnership that provides expansion opportunities that WWE cannot achieve alone. Among the strongest candidates would be a major media corporation such as Disney (who recently invested in MLB Advanced Media), Comcast (owners of NBC Universal and partial owner of Hulu) or Netflix (over-the-top streaming giant). Alternatively, it's possible that the key to cracking the lucrative Chinese marketplace will come from a large investment from a Chinese firm such as Dalian Wanda Group or China Media Capital (both which were bidders on the UFC sale).

The lesson from the UFC sale is that being the best and the biggest in your field may bring out the richest suitors. However, it's difficult to imagine Vince McMahon destroying his competition but ultimately handing away his family's legacy to outside control.