UFC/ WWE: fighters are roped in but valuation is unconstrained

Professional wrestling mogul Vince McMahon can script many things. The stock price of his company, WWE, is not one of them.

McMahon returned to the board earlier this year after an absence imposed by scandals over alleged personal misconduct and corporate governance failings. He said he did so to help engineer the transaction finally announced on Monday.

WWE is merging with UFC, the mixed martial arts business of the entertainment conglomerate Endeavor. Endeavor is led by another showman, Ari Emanuel.

WWE and Endeavor mooted the equity value of the combined business at $18.4bn. The market did not buy that conceit. The price of WWE fell 5 per cent from Friday. That gave the combined company an equity value of just $15bn.

The all-share combination of WWE and UFC should in time create value for shareholders via revenue and cost synergies. The two sides have pledged to cut as much as a tenth from annual combined overheads of $1bn.

Lex is a little more sceptical of revenue synergies. Here, the idea is that a stronger player in the field of violent entertainment, scripted or otherwise, will wrangle better terms for television or online broadcast rights.

The bulk of Endeavor will continue as a public company. It first acquired a stake in UFC in 2016 in a highly leveraged transaction. Today’s merger with the effectively debt-free WWE will massively de-lever UFC, reducing its standalone ratio of net debt to ebitda from 4.2 times to just 2.5 times.

WWE shareholders are to set to own 49 per cent of the new, as-yet unnamed company. WWE’s 2022 operating margin of 30 per cent is nearly half that of UFC’s. Based on relative operating profit contributions, corrected for respective capital structures, WWE shareholders deserve roughly 43 per cent of the combined company.

The deal terms thus imply a premium slice of the pie even if the overall valuation is lagging for now. That provides some protection from twists and turns in the brutal unscripted reality show that is business.