World Wrestling Entertainment: Acquisition Possibility

| About: World Wrestling (WWE)

Summary

WWE has hit record highs in terms of revenues and is still growing internationally.

The UFC sets a strong precedent for the possibility of a sale.

A sale would make strategic and economic sense.

There has been a lot of talk in recent years/months that the WWE might be potentially sold. However, skeptics often cite that Vince McMahon, a man who loves being in control, would never do such a thing. The sale of WWE would make sense, especially given the recent acquisition of UFC for $4 billion by WME/IMG. In 2015, WWE had total revenues of $658.8 million (a company record) and UFC had revenues of roughly $600 million. Moreover, UFC's net profit was $157 million and WWE's was approximately $24.4 million. Besides solid fundamentals, WWE is an iconic brand with world-renowned properties, is the clear leader in sports entertainment, and has a global presence that is embodied by the growing WWE network.

Moreover, the network recorded approximately 1.52 million averaged paid subscribers for the second quarter 2016 (a 25% increase YOY). Not to mention, WWE is expanding its global presence, in a major way, through a multi-year content distribution deal in China with PPTV, the return of a WWE live event to Shanghai in September and the signing of the first-ever Chinese talent.

This article will argue that WWE could be purchased within the next couple of years. The following reasons will be outlined: recent willingness from management to engage in talks, signals from Vince McMahon, the success of the UFC, and the general economic/operational sense it would make.

Management Signals: George Barrios said on the second quarter 2016 conference call that in regards to the sale of the company "they are always open to listening to ideas if that's what's best for fans and employees." This statement may seem harmless, but in my opinion it is not something Barrios would have been allowed to say if it was not true. This goes back to reports that John de Mol, a reality TV mogul, has made a standing offer to purchase the WWE. De Mol's Talpa Beheer last year acquired a 6 percent stake in the WWE (up from 2.4%). This indicates De Mol might be ramping up shares to make an acquisition or be the clear minority controller.

Vince McMahon Signal's: In total, the McMahon family owns 56.1 of the company's stock as of May 2016. Vince and Linda control 51%. Hence, the McMahon family is still firmly in control of the company. This equity structure was the result of selling shares in early May (roughly 2% of total equity of the company). The sale was described as being for "estate planning purposes". Vince also controls 86% of the voting power of the company. Ultimately, the McMahon's could sell the company, but work a deal where they still retain control. This way new ownership could implement better fiscal strategies, expand margins, grow international presence, but allow the McMahons to retain creative control. This might contradict traditional acquisitions of companies, but I think WWE is such a unique business and the McMahon's offer unparalleled human capital. Consequently, such deal would make sense for all stakeholders. Precedents of similar arrangements include: Hugh Hefner retaining creative control of Playboy publications, and Sumner Redstone retaining 80% of the voting rights of CBS and Viacom despite having approximately 10% equity ownership in each.

UFC Sale Success: As stated earlier in the article, the UFC was sold for approximately $4 billion with 2015 revenues of $600 million and a net profit of $157 million. The WWE has a current market cap of $1.52 billion, which could be significantly eclipsed in a buyout for $2.5 to $3.5 billion. As stated earlier, this is based on record revenues of $658.8 million in 2015 and the continued growth of the WWE network, which now has a 1.52 million subscribers paying $10 a month. WWE also has $80 million in cash with a mere $30 million in long term debt. Moreover, WWE has recorded a wide range of net profits, which peaked at $70 million in 1998, were $53.4 million in 2010, $24.8 million in 2011, $31.4 million in 2012, and $24.4 in 2015. Hence, WWE has been able to generate a wide range of profits depending on popularity, margins, revenue across segments, etc. With record revenues in 2015, a buyer, with the astuteness to increase margins and streamline operations, could see a tremendous opportunity.

Economic/Strategic Opportunity: WWE's stock price has hovered in the low teens for the better part of the decade with a flair up to high twenties in 2014, a result of the buzz of the WWE network. Currently, stock price is at $20 a share (under going a bit of a bull run over the last 6 months). Simply, WWE stock price has fluctuated and an exit at a multiple for shareholders would be welcomed. Plus, a sale at a multiple would be huge payday for the McMahon family and other insiders. Moreover, under new ownership the company could have someone with fiscal prowess to continue expansion into the over-the-top market, transformation into a media conglomerate, further expansion into China/international markets, development of WWE Studios development, and the positioning of WWE into an even more mainstream entertainment brand.

Vince McMahon, will always be the greatest wrestling promoter, but now his sights are set on developing WWE into a "well respected" property similar to mainstream entertainment icons. Point in case, WWE no longer standing for "world wrestling entertainment." Also, the development of WWE Studios films, reality TV programs like Total Divas, cross-over success of stars like John Cena/The Rock, etc. Hence, it could be advantageous for WWE to be acquired by a media conglomerate with the resources and brand recognition to continue that transformation.

In Summary: I first recommended purchasing WWE on June 6th. The stock price was at $17.80 a share and recently hit $20.46. It currently sits at $19.86 a share. I believe the stock is still a buy and given the recent expansion into China has a new opportunity to drive metrics/fundamentals. Ultimately, I think WWE is an acquisition target for a media conglomerate and at current prices sale could offer a substantial premium in the future to shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.