The Eyes Of Wrestling Investors Shift To AEW

The recent closing of Endeavor’s acquisition and subsequent spin of World Wrestling Entertainment
WWE
(WWE) for an originally implied value of $9.3b will invariably shift the focus of capital allocators and content distributors interested to Florida-based, All Elite Wrestling (AEW).

The Endeavor-WWE deal, which was first announced on April 3rd, 2023, was not a traditional buyout; rather, Endeavor spun WWE and its existing subsidiary, the Ultimate Fighting Championship (UFC), into a new company, TKO Group Holdings (TKO), which began trading on the New York Stock Exchange on September 12, 2023. Endeavor received 51% of TKO in the transaction, with existing WWE shareholders retaining 49%.

That news certainly impacts AEW, the five-year old outfit owned and produced by Tony Khan (son of Jacksonville Jaguar owner, Shahid), which is considered to be the second biggest promotion in the world; it’s three main television programs regularly draw 1.5 million total weekly viewers in the United States to Warner Bros. Discovery
WBD
(WBD) platforms, five 2023 pay-per-views have received at least 130,000 purchases and a recent live show at Wembley Arena in London, England had 72,265 fans in attendance.

The Macro Environment Is Favorable

Considering the recent success of the WWE, which has seen record revenues and increased viewership ratings despite a continuously challenging cable environment, it can be argued that the business of professional wrestling is as popular now as it has been in decades.

And while the WWE’s flagship programs, Raw and Smackdown, which air on NBCUniversal (NBCU) and Fox platforms respectively, are already drawing attention as their 2024 television rights renewal looms, it’s AEW’s programming on WBD that expires first, reportedly at the end of 2023.

The timing is favorable in some respects; the ongoing Writers Guild of America (WGA) and Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) strikes mean that platforms are scrambling for content (professional wrestling is not subject to the restrictions of most scripted programming).

To wit, the Chief Financial Officer of the aforementioned WBD indicated that the company has had free cash flow rise as they’ve been “unable to deploy capital for production”, so it’s certainly possible that traditional media companies and various streaming platforms would be interested.

At the same time, there’s only so much capital to go around, and both the National Basketball Association (NBA) and the WWE have rights up for renewal in the United States within the next 18 months.

So, the TV rights are certainly important.

But what if AEW follows its competitor to the north and seeks outside investors?

There is no indication that AEW is looking, and Khan has publicly shot down questions on the topic, but it makes too much sense not to wonder.

Like most businesses, especially those in industries where talent is both critical and expensive, growth requires capital. And though Khan has been clear that he has the funding necessary to sustain the business, he’s also an admitted student of professional wrestling history, which is littered with examples of promotions that grew, stagnated and ultimately declined.

If capital is accessible now, and the market for his company is frothy, he’d be foolish not to consider all options, including minority investments from growth-focused private equity firms that target the Media & Entertainment sector. Such a move would still allow Khan to control AEW, an important factor given his self-acknowledged lifelong passion for the professional wrestling industry.

Outside investment can also signal that the market agrees with the company’s valuation and business model

That’s important for public perception, especially given the existing-but-thankfully-dwindling stigma of professional wrestling. The WWE’s 1999 Initial Public Offering (“IPO”) was critical for their growth path for that reason.

If Khan were to explore raising outside capital, a potential valuation is murky given that AEW’s financial statements are confidential as a private company, but WWE’s published financial information and recent sale provides some guideposts.

The WWE’s final implied valuation when the acquisition closed and TKO started trading was $8.53 billion, or 6.2x the $1.37 billion that WWE’s 2023 revenues were trending towards when adjusted for seasonality.

Revenue is an important marker; AEW is a nascent company that Khan himself has noted is still seeking profitability, so comparing the valuation of the two companies as a multiple of revenue – rather than earnings – makes more sense.

Khan has also publicly disclosed that AEW’s 2022 revenue was over $100 million USD. Though trust but verify is always wise when private companies disclose their financials, assuming the $100 million number is accurate, a 6.2x multiple would value AEW at approximately $620 million USD.

But that’s with the existing WBD deal, which is valued at least ~$40 million/year according to reports. However, potential investors would likely look at forecasted revenues (or free cash flows), especially when there is a material event on the horizon like, for instance, a new television rights contract. Unfounded rumors earlier this year pegged a potential deal at north of $200 million/year, but even $100m/year would push approximately $60 million more right to the top line revenue and increase AEW’s valuation at a 6.2x multiple to just shy of $1 billion.

A $1 billion valuation would be in line with what Khan has said he’s been offered, though trust but verify applies there as well.

But there are reasons to doubt that AEW could be valued at 6.2x revenue, at least now.

First, the WWE valuation prices in significant cost synergies (or redundancies) from its new shared umbrella with the UFC that AEW would not realize.

Second, the WWE brand is well known, and investors/acquirers will often pay higher multiples based on brand recognition, or so-called goodwill.

And finally, and perhaps most importantly, key operating metrics in advance of March’s deal with Endeavor indicated fan interest was growing in WWE; television ratings for their programming were up 8%-9% YOY and average show attendance was up 37% for Q1 2023.

AEW, on the other hand, has seen a softening.

Ratings for their most popular show, Dynamite on TNT, shrunk for last week’s episode by 24% overall and 21% in the age 18-49 demographic compared to the same time in 2022.

And tickets distributed for that same show, emanating from Cincinnati, Ohio, were down 44% compared to AEW’s most recent show at the same venue in October of 2022.

Both exemplified a trend that has permeated 2023 for AEW, and that is perhaps at least part of the reason that there has been little public news about the next television deal when the current deal is apparently ending so soon.

Even so, given the macro-level content environment, broader public interest in professional wrestling, the benefits of outside investment and the never-ending search for deal flow in private equity, AEW would likely still be an attractive target for capital.

Coupled with the potentially quickly-approaching end to their television deal, and it’s a very interesting time to be following the business of AEW and broader sports entertainment business.