Description

The McMahon family just completed a secondary at $11.50 per share that was badly managed as the stock was trading at $15 right before the deal was announced. Their distressed price is a VIC opportunity to buy a great franchise at very low valuation of EBITDA and free cash flow. Since, I anticipate the stock will trade up quickly after this print this is going to be a short write up.

WWE is a monopoly producer of wrestling related entertainment. They have bought/driven out all the competition - most recently the WCW which was financed by TWX and Ted Turner. Linda and Vince McMahon are savvy operators who were snookered by UBS into thinking that their stock would trade better with a bigger float. This has cost them about $24mm in this secondary. The company is poised for growth as they are finally getting serious about international expansion which I think could eventually double the size of the business. The biggest knock on the business is that it is a fad. It is a fad that has been going on for decades. I used to own Jakks Pacific Inc. (I sold it due to a management team that kept doing stock sales before blowing the quarter). They have the WWE doll license and have had it for about 15 years. They say that while there is some cyclicality due to story lines and hot characters (think Hulk Hogan and the Rock), it is at the core a stable and growing franchise. Their Pay Per views are consistently in the Top 10. Their live events usually sell out.

Valuation

At the current 11.60 quote, you are creating the business for 5.87x the 90 of EBITDA that I project for this year. If the stock were to trade at 10x EBITDA which is still cheap for a media company, you get $17 a share. 90 * 10 = 900 +258 of cash = 1158/68.4 = 16.93. At 12x you get: 90 * 12 = 1080 + 258 = 1338/68.4 = $19.6. Capx is only 5mm a year and you get a 2% dividend yield while you wait twice the 1 year t bill.

Catalyst

The market digests this horribly managed secondary. The stock trades back to the teens. I am putting my son’s college money in it as we speak. I will be on vacation this week so won’t be able to do any q and a but I think this is a nice trade and a good longer term investment as well. Let’s get ready to rumble.