It’s been nearly two weeks since Endeavor Group Holdings (NYSE:EDR) announced the UFC-WWE merger to create a $21 billion global live sports and entertainment company.
I was skeptical of the move when they announced the deal April 3. However, I didn’t oppose the idea of Endeavor spinning off UFC into its own independent public company. Companies do it all the time. It’s understandable.
However, why would an intelligent entertainment industry executive like Endeavor CEO Ari Emanuel merge the two businesses? To me, it makes no sense. It’s almost like combining Pornhub and Disney (NYSE:DIS). They’re oil and water.
Here’s what Emanuel said in its April 3 press release.
“This is a rare opportunity to create a global, live sports and entertainment pure play built for where the industry is headed,” Emanuel stated. “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.”
There is no question the potential upside is significant. That’s because live sports is the only media platform that remains a big draw for advertisers. Just look at the demand for Super Bowl ads every year.
So, yes, I get the whole “live sports” argument. However, I don’t get why it’s merging with World Wrestling Entertainment (NYSE:WWE).
Here are my three reasons the UFC-WWE merger makes absolutely no sense.
| EDR | Endeavor Group Holdings | $24.25 |
| WWE | World Wrestling Entertainment | $103.10 |
Like Oil and Water
I’m not a big UFC fan. However, my wife and I would go to her friend’s house for dinner and drinks for many years. Her friend’s husband was a big fan. So, naturally, after a few wobbly pops, we’d end up watching some fights.
The men and women who get in the UFC Octagon to fight each other are tough cookies. They can take a punch or kick like nobody’s business. They train like crazy to move with cat-like speed and agility. Watching these athletes compete, you respect their commitment to the sport.
The WWE provides entertainment. It in no way represents a sporting activity. Olympic wrestlers would be horrified to be compared to WWE wrestlers. I’m not saying WWE entertainers aren’t athletes because they are, but they’re not participating in a sport.
It’s not real.
The risk here, if you’re the UFC and Dana White, is if your customer base questions whether the toughness exhibited by their athletes is all a show, just like the WWE.
It’s akin to the “Big Fix” of 1919 when several Chicago White Sox Major League Baseball team players agreed to throw the World Series in exchange for $100,000 per player participating in the conspiracy. As a result, although never criminally convicted, the players were banned from playing in the major leagues.
Having watched enough UFC, it’s hard to imagine its athletes being able to fake their way through a competitive fight. However, I guess anything’s possible.
Why sour a good brand by associating with actors?
Vince McMahon and Shareholder Value Creation
Ari Emanuel said it right there in his press release. Vince McMahon has created shareholder value for decades. Has he?
The WWE, known as World Wrestling Federation Entertainment at the time — it was forced to change its name in 2002 after the Worldwide Fund for Nature sued the company to get them to stop using the WWF acronym — went public in October 1999, selling 10 million shares of its stock for $170 million. The IPO valued the company at nearly $1 billion.
In fiscal 1999 (April year-end), it had an annual revenue of $251.5 million with an operating income of $58.0 million. So, its valuation at its IPO was 3.8x sales and 16.6x operating income. Between 1997 and 1999, WWE’s revenue grew 207%, so there’s no question it was growing quickly when it went public.
Today, the WWE has a market cap of $7.7 billion, a valuation of nearly 6x sales, and 27x operating income. So, over 23 years, its valuation multiple has increased.
Ultimately, however, if you invested $10,000 in its October 1999 IPO, today, you’d have $60,459, a compound annual growth rate of 8.0%. Likewise, if you invested the same $10,000 in Churchill Downs (NYSE:CHDN) over the same period, you’d have a CAGR of 16.3%, double the WWE’s return.
I don’t see the value creation Emanuel’s talking about.
There Are Better Merger Partners
Let’s assume that Emanuel’s sole goal was creating a live-sports conglomerate. There are so many better partners. I mentioned Churchill Downs in the previous section. At least its customers bet on actual sports.
Who is a better merger candidate?
I can think of three names: 1) Madison Square Garden Sports (NYSE:MSGS), 2) Disney’s ESPN, and 3) Fanatics.
MSGS owns the New York Knicks, New York Rangers, the NBA G League’s Westchester Knicks, the American Hockey League’s Hartford Wolfpack, and several other assets. It has a current market cap of $4.7 billion.
As for ESPN, Disney has been rumored to be considering spinning off its sports network for years. However, Disney CEO Bob Iger put that to bed for the time being by stating in February that it wasn’t planning a spinoff.
“ESPN is a differentiator for this company, is the best sports brand and television, is one of the best sports brands in sports. It continues to create real value for us. … We just have to figure out how to monetize it in a disrupting and continuing disrupting world. That’s it,” The Hollywood Reporter reported Iger’s comments from February.
Lastly, Fanatics, while not a public company, has contemplated going public for some time. In December, it raised $700 million in funding, putting a $31 billion valuation on the global commerce platform.
It has three business segments: Fanatics Commerce, Fanatics Collectibles, and Fanatics Betting & Gaming. Why not a fourth? Fanatics Live Sports.
Any of these three would be better business partners.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
