Description

EDR was written up just under ~6 months ago (check that one out too), but given the nature of the recently announced transformative merger between UFC and WWE, it made sense to provide a fresh perspective with an updated thesis, catalyst path, and risk/reward.  This commentary speaks more from EDR's perspective (as this is the way we're expressing our investment), though an investment in WWE directly is also interesting (it is the pure play way to invest in the proforma WWE+UFC entity which will ultimately trade under ticker TKO).  TKO's risk/reward is also provided in terms of WWE stock.

Thesis Summary

Endeavor Group is a portfolio of sports and media/entertainment assets including the Ultimate Fighting Championship (UFC) and representation agency William Morris Endeavor (WME).  At ~$24, it’s an ~$11bn market cap company and has ~$4.5bn of net debt (excluding the recently announced IMG Academy sale for $1.25bn), and it trades ~$20-50mm a day.  The reason why it’s interesting is that the trophy asset, the UFC, is poised to see a significant step-up in its media rights contract that is set to expire at the end of ’25.  Beyond that, the company just announced a deal to merge the UFC with WWE (to be completed 2H this year, will trade separately as ticker TKO) and the combined entity will benefit from scale, at least $100mm of cost synergies, and WWE has its own set of domestic media rights that are currently being negotiated.  TKO will be an ‘impossible to ignore’ pure play of two global sports and entertainment leaders.  UFC has become one of the fastest growing leagues in terms of popularity, and WWE has similarly continued to maintain some of the highest linear tv ratings as well as continues to see record turnouts for its live events.  Looking out to ’26 after the merger has been completed and both the WWE and UFC each renew their media rights deals, you can conservatively pencil to pro forma EBITDA at TKO in excess of $1.6bn.  At any reasonable multiple for this high quality, scaled, publicly traded collection of sports leagues (17x+ EBITDA vs Formula 1 trading >20x), EDR’s retained ownership in TKO (51%) would be worth all of EDR’s current enterprise value.  And what you’re left with, EDR’s remaining businesses (which include the representation agency William Morris Endeavor, as well as an events business that manages some of the highest profile events across the globe including the Super Bowl) will generate ~$700mm+ of EBITDA.  Adding it all up, the stock appears asymmetric and could easily trade toward $40-50 in a base case (65-100% upside), and it’s hard to see a scenario where the stock is materially less than $18-20 (even assuming lower renewal step-ups and onerous valuation multiples).  WWE’s current stock price implies you’re creating the TKO asset at ~13x PF EBITDA (similar to where WWE’s unaffected stock has historically traded, but this new entity will be significantly improved with TKO’s wholly owned UFC stake that should trade more like a Formula 1).

The biggest risks are mainly around the magnitude of the renewal step-up (though deal comps, viewership, and inflation in general point to a healthy outcome), and perhaps the potential for less appreciation in media rights as companies across the industry have tried to pare back budgets (also impacts the representation business).  Given the execution required, some investors also comment on the risk around the dynamic personalities involved including Ari Emanuel, Dana White, and Vince McMahon.  The main risk is perhaps that the stock could remain ‘dead money’ for a bit until the merger is finalized and the rights deals are completed.  Nonetheless and considering the challenging macro environment, an entry price in the low $20’s feels like a ‘safe’ place to hide while we wait for these catalysts to resolve in the next 6-12 months.  Further, this collection of assets (with significant portions of EBITDA tied to contractual obligations and a de-levered pro-forma balance sheet) should prove relatively defensive if equity markets draw.          

Quick Background / Assets Description

Taking a step back, Endeavor Group Holdings (“Endeavor”, “EDR”, the “Company”), is a global entertainment and sports conglomerate. Founded in 1995 as Endeavor Talent Agency by Ari Emanuel, the company initially focused on talent representation. In 2001, it merged with the William Morris Agency to form WME.  In 2013, WME acquired IMG, expanding its presence into sports and events. Rebranding as Endeavor in 2017, the company acquired the Ultimate Fighting Championship (UFC) in 2018, and in April 2019, Endeavor went public on the NYSE (Ticker: EDR). Today, Endeavor operates in talent representation, owned sports, events, and media, aiming to create immersive experiences globally.  A few weeks ago on April 3^rd, Endeavor announced it agreed to merge its wholly owned subsidiary UFC with WWE, and the endeavor parent will retain a 51% interest in the pro forma entity.  This transaction is expected to close in the 2^nd half of ’23.  Endeavor currently operates with four distinct segments:  Owned Sports, Representation, Events (events, experiences, and rights), and Sports Data & Technology.   

The Owned Sports segment operates professional sports leagues, teams, and related properties. It generates revenue through media rights deals, ticket sales, sponsorships, merchandise sales, and licensing agreements. The key owned sports entities include the Ultimate Fighting Championship (UFC), Professional Bull Riders (PBR), and the Euroleague basketball league.  This segment historically represents about half of EDR’s EBITDA (excluding WWE) and has been growing double digits.  Upon completion of the WWE transaction later this year, EDR will consolidate all of TKO’s financials while retaining its 51% stake in the entity.   

The Representation segment encompasses talent agencies, management firms, and marketing agencies. EDR represents a wide range of clients, including actors, writers, directors, musicians, athletes, and content creators.  Revenue in this segment is primarily derived from commissions earned on negotiated contracts, endorsements, sponsorships, and licensing deals, and the segment has represented a low 20’s% of EBITDA (excluding WWE).    

The Events (events, experiences, and rights) segment organizes and produces live events, including sports competitions, concerts, festivals, and experiential marketing activations.  EDR owns some of these events including the Miami Open, New York Fashion Week, and Barrett Jackson, and it operates events on behalf of other owners and leagues including the Super Bowl, the Ryder Cup, and Coachella, to name a few.  The Company leverages their extensive network and industry expertise to curate engaging and high-profile events. Revenue in this segment comes from ticket sales, sponsorships, advertising, concessions, and partnerships.  The Company also negotiates media rights deals on behalf of more than 150 clients including the Olympics and the NHL.  This business has represented a bit shy of ~30% of the Company’s EBITDA historically.

This year Endeavor broke out a fourth segment called Sports Data & Technology.  This segment includes IMG Arena, which provides data and live streaming services to sportsbooks and sports betting operators, and OpenBet, which provides a platform to sportsbooks to help them manage risk, operate the betting engines, and manage player wallets. EDR monetizes this segment through licensing fees and revenue-sharing arrangements with their partners in the gambling industry.  This segment will contribute a LSD% of EBITDA (but has the potential to scale nicely with a fast growing sports betting industry).

Thesis / Investment Highlights

• UFC media rights renewal:  Endeavor’s marquee owned media asset, the UFC, has its domestic media rights up for renewal (ESPN) at the end of ’25 which could see a ~2x+ AAR step-up that would make ’26 EBITDA ~$300mm higher than the ~$600mm the asset will generate in ’23.
• WWE merger: The Company recently announced a deal to merge UFC and WWE to create TKO in a transaction that has a host of positive implications for parent company Endeavor’s 51% stake:
  1. WWE’s domestic linear TV rights are also up for renewal and expected to see a decent step-up (The negotiation process is currently underway as the current deal expires the end of ’24).  These rights are expected to be renewed at a ~1.5-2x AAV step-up by existing holders (NBCU and FOX) or ultimately to the highest bidder.
  2. The PF business will have more scale with initial cost synergies expected to be ~$100mm+.
  3. TKO will have just ~$3bn of net debt on ~$1.6bn of PF ’26 EBITDA (PF for rights renewals) which implies a substantial deleveraging from the ~3.5-4x EDR is currently levered at (and one of the key pushbacks investors have had since EDR came public).  The additional scale from the deal will also make TKO (and consequently EDR) a substantial media asset (implied market-cap of TKO today is ~$16bn) that investors will ‘need’ to pay attention to.
• Valuation: Pro Forma for the rights renewals and the WWE acquisition, both TKO and parent EDR at ‘too cheap’ vis-à-vis other media assets like FWONK and LYV (and EDR offers better growth and margins).  If you assume TKO ultimately trades for ~17x PF EBITDA (a blend of WWE and FWONK’s multiple), the implied equity value pursuant to EDR’s 51% ownership interest would account for the entire enterprise value of EDR today, leaving you the rest of EDR’s assets ‘for free’.  The remaining assets (including WME and the events business) should generate ~$700-800mm of EBITDA annually over the next couple of years and are high quality businesses.  Adding it all together, parent company EDR could easily trade for ~$40-50 in a couple years implying ~65-100% upside.  Moreover, even accounting for a material conglomerate discount and very onerous assumptions, it’s hard to pencil EDR being worth significantly less than ~$18-20 in most scenarios, leaving an asymmetric opportunity at ~$24.      
• High quality asset:  TKO will be a unique ‘trophy’ asset (there really aren’t many pure-play publicly traded sports leagues).  Sports media rights have been some of the most coveted assets across all of media (they still encourage live ‘appointment’ viewership and bring TV ratings in a ‘watch anytime’ Netflix world).  Beyond the scarcity and unique quality, the fundamentals of the business are also superior with mid/high 40’s% EBITDA margins and attractive FCF characteristics.  Further, a healthy portion of the EBITDA is contractual per the media rights, which makes these assets defensive in a challenging macro environment.

Risks

• Timing:  The predominant catalysts are the rights renewals and the completion of the merger (creation of TKO), and the stock may remain ‘dead money’ while it’s in ‘deal purgatory’.  WWE’s media rights are currently being negotiated, UFC’s have the potential to be completed this year or perhaps 1H ’24, and the merger completion is a back half ’23 event.  Nonetheless, this complexity is set to resolve itself over the next ~12 months and the risk/reward is asymmetric at these levels.
• Media industry content budgets:  Cyclical concerns around tightening content budgets amidst a rising rate environment have been cited in the investment community, but EDR’s direct exposure to this is nuanced (EDR’s clients such as tv stars are still getting their fair share while budget cuts are going to other aspects of production).  Moreover, overall content spend across the industry is still likely to rise ~HSD over the next few years.  On the rights side, cord cutting is a concern with respect to the nominal value of linear tv media rights (though monetizing through digital channels can make up for this shortfall).    
• Management egos / execution:  EDR and TKO will be managed by Ari Emanuel, Dana White, and Vince McMahon, all of which have big personalities.  Some question whether this could lead to execution issues down the road.
• Labor cost inflation:  The UFC (and WWE) pay a significantly smaller percentage of revenue out to their ‘performers’ (fighters/wrestlers) vis-à-vis sports leagues like the NBA that pay out some ~50%.  It’s possible that splits could evolve in favor of labor over time, though each of these leagues/organizations have existed for years with current structures.  In theory, this could invite new league competition (similar to what happened with LIV golf and the PGA Tour), though there does not seem to be anything of this sort currently in the works.
• ‘Complexity’ discount:  It is likely that EDR will trade at some ‘complexity’ discount to the SOTP as per any other ‘holdco’ structure.  Nonetheless, there is plenty of underlying NAV such that even a healthy discount should leave room for ample share price appreciation.

Catalyst

• Media rights renewals (WWE and UFC)
• Completion of the UFC + WWE merger