First discussion I’m posting here. Hope you benefit from it. As a warning it will be mostly point form. Valuation is at the end if you want the TLDR. Here goes.
TKO group describes themselves as a premium sports and entertainment company that comprises the UFC and WWE.
On September 12, 2023 Endeavour group (the then owner of UFC) and WWE closed a transaction to combine the two entities to form a new, publicly listed company (TKO group holdings). Endeavour Group Holding (also publicly traded btw) remains majority shareholder with 51% of outstanding shares.
Unfortunately, there is not much data that I could find on the combined group. Financials that I found cover only January 1, 2023 – December 31, 2023 for UFC and September 12, 2023 – December 31, 2023 for the combined WWE and UFC. Parent financials for are available for through Endeavour Group Holdings dating back only to 2021. WWE financial reports are available back to 2000 as it was a separate publicly traded company.
History:
Both the UFC and WWE are household names and represent the most well recognized franchises in combat sports and wrestling entertainment respectively. Additionally, both companies have long operating histories. For reference the UFC just celebrated its 30th anniversary having hosted its first fight in 1993 and will be celebrating the UFC 300 event this coming April. The WWE dates back even further, tracing its origins back to the 1950s being founded by either the father or grandfather of the well-known (and now somewhat infamous) figurehead Vince McMahon according to Wikipedia.
About the business:
Under the new combined company the UFC and WWE will operate us separate entities. The UFC will led by Dana White, who has served as president of the UFC since 2001 and grown it to a multibillion dollar business. The WWE being led by Nick Kahn who joined the WWE in 2020 and took over the role of President in 2021.
Per their 10K for fiscal year ended December 31, 2023 TKO group generates revenue from principal activities:
- Media rights and content.
- Live events.
- Sponsorship.
Consumer products licensing.
Media and content:
TKO generates revenue from licensing live events and original programming to broadcasters domestically and internationally that carry TKO programming on digital and linear channels as well as pay-per-view.
These contracts last 3–5 years with broadcasters but they have some significant agreements lasting 7–10 years.
Broadcasters that have contracts with WWE or UFC include: ESPN, ABC, Comcast, Fox, Peacock, Tencent, Sony, Warner Brothers and now Netflix.
Programming includes long and short for content, reality, series, and other filmed entertainment. Furthermore, TKO not only sells to distributors but also sells direct to consumers through UFC fight pass and WWE network.
- Live events:
Live events generate revenue generation through ticket sales, site, fees, travel packages, and VIP experiences.
Between WWE and UFC generate 350 annual live events per year
- Sponsorships:
TKO generates ad revenue and sponsorship revenue from sale of in-venue and in broadcasting advertising assets and digital impressions.
Ad revenues are driven by original content on third party social media platforms. For example, WWE has 100 million subscribers on YouTube and is the 12th most followed channel.
TKO group also has partnerships with major brands, including Anheuser-Busch, Draft Kings, GM, P&G, Monster Energy, Wendy’s, Toyo tires and others.
- Consumer product licensing:
TKO group merchandises a broad, portfolio of products, including video games, trading cards, apparel, memorabilia, equipment, toys, and digital goods. This is done mostly through royalties and licensing fees, through sales of branded products and event sales as well as via e-commerce platforms. The largest sales items here are video games and toys. There are agreements with EA sports for UFC and Take Two for WWE for video game franchises. Additionally, there are agreements with Mattel to produce toys.
Why invest?:
1. Synergies- I believe there are synergies to be had between UFC and WWE in terms of securing media rights and sponsorships. Further, Endeavour Group Holdings as a majority shareholder with their talent management and online sports betting businesses is likely to be a motivated co-owner in furthering promotion of these two business brands.
There are significant tailwinds to content provision. Sponsors are projected to increase their spending on live sports and entertainment advertising at a 9% CAGR over the next two years. Streaming providers (Netflix, Amazon, Apple) are also expected to increase their spend by CAGR’s reaching the mid 20% range. With the competition between streaming services heating up there is likely to be competition for sought after quality content such as the programming provided by WWE and UFC.
Mixed martial arts (MMA) is growing rapidly in popularity with the UFC easily being the most recognized franchise in MMA. For example, it is reported that sports betting on UFC is the largest growing segment in the sports betting industry. With rising popularity of their broadcasts they may be able to increase the pricing of ad placement.
Risks:
1. WWE CEO Vince McMahon’s recent departure leads to less certainty with leadership, however, given the recent scandals surrounding him this may be more positive than negative for the WWE side of the business but the impact of this remains to be seen.
While WWE’s revenue has grown substantially over the past decade, growth has slowed and I don’t envision as much growth in this aspect of the combined business.
It is possible that UFC’s growth could be hampered by increased competition from other combat sports / franchises including boxing, K1 kickboxing, Combat karate, and One Champ. For the foreseeable future, however, UFC is clearly the dominant player in MMA.
Valuation:
Valuation is somewhat difficult given the paucity of available information, however, management has provided 2024 FY guidance in their most recent report and are targeting a free cash flow conversion of greater than 50% with EBITDA in range of $1.15–1.17 billion.
From: https://investor.tkogrp.com/files/doc_financials/2023/q4/TKO_4Q23-Earnings-Release_2-27-24_FINAL.pdf
Now IF management performs as they predict for their 2024 full year guidance this would give an estimated free cash flow of $558 million at 50% FCF conversion of $1.15 billion EBITDA on the lower end of estimates to $644 million at a FCF conversion of 55% on $1.17 billion EBITDA on the upper end.
Given a market cap of $7.064 billion (as of March 28, 2024) this translates into a FCF yield of 7.90% at the low end of estimates and 9.12% at the upper end of estimates.
Also, Goldman Sachs recently initiated coverage at a buy with a price target of $102.
All in all not a bad return IMO for owning two of the most dominant names in their respective domains.
Disclosure: Long TKO
Sources:
1. TKO Group Holdings 10-K Dec 31, 2023: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001973266/142af594-111f-470a-a3db-9641dffd4445.pdf#page57
2. TKO Group press release: https://investor.tkogrp.com/files/doc_financials/2023/q4/TKO_4Q23-Earnings-Release_2-27-24_FINAL.pdf
3. WWE investor relations: https://corporate.wwe.com/investors/investor-overview
4. Seeking Alpha: TKO gains as Goldman starts at Buy, seeing discounted valuation.
