We hope you can join us on Today, December 20th at 2:00PM EST as we review our latest work on new Best Idea Long TKO Group Holdings, Inc (TKO).
TKO is a newly formed entity combining World Wrestling Entertainment (WWE) and Ultimate Fighting Championship (UFC). On a pro-forma basis, WWE is ~53% and ~38% of TKO revenue and EBITDA, respectively, with the remainder attributable to the UFC. The thesis/strategic reasoning behind the merger can be summarized as follows:
- Combine two powerful brands: TKO leverages the existing fan bases and brand recognition of both WWE and UFC, boasting over 1 billion fans worldwide. This allows for cross-promotion, expanded viewership, and increased global reach.
- Enhanced media rights: TKO aims to leverage Endeavor's expertise in media rights to secure more lucrative deals and increase revenue from both traditional and digital platforms.
- Operational efficiency: Combining resources and streamlining operations can lead to cost savings and increased profitability. Management is targeting ~100M annualized expense savings by 2025 and driving consolidated EBITDA margins from low-40% to high-40% / low-50%.
- Advertising and sponsorship: TKO aims to leverage Endeavor's assets, such as On Location, IMG, and William Morris, to bolster advertising and sponsorship deals; as well as lean more heavily into premium experiences.
- Sports betting opportunity: Sports betting is a rapidly growing industry and integrating it with the combined offerings of WWE and UFC could open up significant new revenue streams. This would come from betting on UFC matches, which are competitive sports events. Betting on WWE events, which are scripted, would be more complex and would likely require a different approach, perhaps focusing on aspects of the event other than the outcomes.
- Embrace new technologies: TKO seeks to leverage technology to enhance fan engagement and create new interactive experiences. This could include virtual reality, augmented reality, and other emerging technologies. This could also include advertising technology for WWE, which traditionally has shunned advertising in their events.
- Global expansion: TKO aims to capitalize on the global popularity of both WWE and UFC to expand its reach into new markets and further increase its fan base. Major growth markets include MENA, the U.K, Australia, Canada, and India.
- Sports betting opportunity: Sports betting can increase fan engagement by providing a new way for fans to interact with the content and potentially win money. This can lead to increased viewership, longer attention spans, and stronger connections with the TKO brand. Sports betting can also attract new audiences who are interested in sports but not necessarily fans of WWE or UFC. This can expand TKO's reach and introduce its content to a wider demographic.
- Maintaining the lead: TKO seeks to increase brand awareness and profitability of their two sports by maintaining lucrative rights deals, signing the best talent, and providing the best platform. Newcomers in both wrestling (AEW) and MMA (PFL) threaten to take market share from the incumbents, but the expected synergies between the WWE and UFC brands help each individually maintain their lead in the market.
- Create compelling content: TKO combines the experience of WWE in scripted entertainment with the real-life drama of UFC to develop a diverse range of engaging content for various platforms. TKO can draw on the WWE's vast pool of historical content and expertise in production to bolster the reach and viewership of the UFC using similar strategies.
- Develop new formats: TKO plans to explore new content formats beyond traditional live events and television broadcasts, potentially including documentaries, reality shows, and even feature films.
- Own intellectual property (IP): As a "pure-play IP ownership company," TKO focuses on owning and controlling its content, maximizing its long-term value, and generating recurring revenue streams.
Why does this opportunity exist?
Shares of TKO have come under pressure since their September 2023 debut as the market for sports rights has cooled LTM. Traditional buyers (FOXA, CMCSA, DIS, WBD, et. al) have raised their ROI thresholds for licensed content investments in response to 1) a persistently weak linear advertising market and 2) a focus on streaming service profitability. WWE management had communicated to the street (spring 2023) an expectation that 'Smackdown' rights would renew in the fall of 2023 at a 1.5x step-up to the 205M/year 2018 rights deal signed with FOXA. However, on 9/21, it was learned that FOXA opted not to renew, and 'Smackdown' rights went to CMCSA for distribution on 'USA network' (smaller audience) at a 1.4x step-up... which immediately triggered concerns over the upcoming 'RAW' rights renewal in the fall of 2024.
This abovementioned series of events resulted in TKO's multiple compressing to ~12.5x 2024 EBITDA, where sports rights pure-plays historically have traded as high as 20-25x (see Formula 1). Keeping us from getting involved on the long side of TKO at 100 (out of the gate) was the market's perceived value of WWE, which prior to the merger, WWE saw its multiple nearly double from 10-12x EBITDA in 1H22 to 20-22x by August 2023. Today, we believe market expectations have reset, and the consolidated multiple reflects a HSD EBITDA multiple for WWE and a mid-teens multiple for UFC. And that risk/reward at 73/share is attractive as uncertainty over 'RAW' renewal and sports rights resolves over the next 6-12 months.
Please call or e-mail with any questions.
Andrew Freedman, CFA
Managing Director
@HedgeyeComm
