With UFC-WWE Merger, Endeavor Looks To Bring Its MMA Playbook To Professional Wrestling

At a recent Morgan Stanley
MS
investor conference, Endeavor CEO Ari Emanuel was asked for his thoughts on mergers and acquisitions. “Our approach is if it hits a couple buckets,” Emanuel replied. “We’ve got to be able to cut costs. We’ve got to be able to grow revenues across multiple categories. And then we have to be able to figure out ways in which it can either benefit the flywheel or take the asset internationally. And so that’s how we look at acquisitions and we’ve done, I think, a pretty good job doing that.”

While it was known at the time that the professional wrestling organization WWE was potentially on the market, and there were rumblings of a possible Endeavor acquisition, executives at Endeavor had also made it clear deleveraging was a priority. The company had added substantial amounts of debt with its 2016 UFC acquisition and had since been in the process of paying down debt and reducing its leverage ratios, especially when interest rates began rising last year.

CFO
CFO
Jason Lublin noted on Endeavor’s February earnings call that the company had recently paid down $500 million in debt and S&P Global Ratings increased the company’s credit rating to B+. When asked about further deleveraging at the Morgan Stanley conference, Emanuel responded, “Yep. That’s one of the big… There are many priorities but that’s very high on the list.”

Then came the news on Sunday that the UFC would be spun off into a separate publicly-traded company and merged with the WWE. As the parent company to UFC, Endeavor would own a controlling 51% interest in the yet-to-be-named “NewCo” business that will eventually trade under the stock ticker “TKO,” and WWE shareholders would own 49%.

Essentially, Endeavor now gets to apply its flywheel to the WWE while continuing to grow the UFC, pending regulatory approval. The upside for WWE shareholders is sharing in the UFC’s growth while seeing if the Endeavor flywheel can help propel the wrestling organization in similar ways that caused the UFC’s value to triple in less than seven years ($4 billion enterprise value in 2016 to $12.1 billion today), along with any cross-promotional fan base expansion the two sports properties might be able to achieve.

The ”flywheel” is a term Endeavor executives used to describe as a “network effect” around the time of the company’s first attempt at an initial public offering in September 2019. That offering was pulled as some investors struggled to understand the Endeavor value-creation story and, more importantly, the IPO market hit a soft spot as Uber
UBER
and Lyft underperformed expectations earlier that year, the WeWork debacle happened in the preceding month, and Peloton went public with a lackluster debut the day before Endeavor’s scheduled offering, finishing the day down 11%.

When Endeavor returned to public market readiness in early 2021, the flywheel was born.

So what is the Endeavor flywheel? Emanuel explained it as the following at the Morgan Stanley conference: “And so what do we do for the UFC? Endeavor streaming does their streaming services. Their sponsorship business, we do their sponsorship business. On Location does the high-end experience business. IMG does the international sales. Our government relations team does the location fees that we get when we go across the globe. And our licensing business does the licensing.”

That’s what’s heading for the WWE when the merger closes.

UFC sponsorship revenues were $52 million in 2015 – the year before the Endeavor purchase – and had been stagnant for a four-year period. According to Endeavor’s most recent earnings call, UFC sponsorship revenues are now “nine figures.” The promotion renewed 10 international media rights deals in 2022, per the same call, with an average annual value up more than 100% over prior deals. In 2015, international media rights were a little over 10% of the UFC’s overall revenues. Even site fees (a.k.a. location fees) have grown to the point where they’re now specifically being mentioned on earnings calls.

Overall, UFC revenue has grown from $690 million in 2016 – the year of the Endeavor purchase – to over $1.1 billion in 2022. According to an investor presentation made public with the SEC as part of the WWE merger, UFC earnings (Adjusted EBITDA) have more than doubled from 2017 to 2022 ($257 million to $629 million) while the company’s free cash flow
flow
has more than quadrupled from $112 million in 2017 to $489 million last year.

While some of this is growth surely would’ve happened anyway, Endeavor’s focused and targeted teams such as sponsorship, government relations, and IMG certainly deserve credit as well. In sponsorships, for example, there’s been a noticeable expansion and monetization of opportunities during the Endeavor era with deals such as “the official Layer 1 Blockchain” and “the official electric commercial truck.” While not the same types of sponsorships, they’re a far cry from the UFC’s Condom Depot and Dynamic Fastener days.

The final part of the Endeavor flywheel is eliminating redundant expenses and optimizing the cost side of the business. Not long after Endeavor’s purchase of the UFC, the promotion laid off 15% of its staff and various members of the management team started leaving. Overall, Endeavor was able to realize roughly $70 million in operational synergies. With the WWE merger, the target is $50-100 million of those same synergies, per the investor presentation.

So it appears Ari Emanuel and team are sticking with their playbook: Find a partner where costs can be cut, revenues can be grown in multiple ways, and if an opportunity for cross-promotional growth also presents itself, all the better.

Emanuel has been asked his thoughts on acquisitions at a number of recent earnings calls now. But perhaps what’s most impressive about this transaction is Endeavor was able to pull off a major M&A deal in the live sports and entertainment space without adding to its debt load and with a partner that should allow it to sail through the regulatory approval process. The UFC and WWE rarely compete for athlete talent, and while they’re both in the business of evening entertainment for consumers, there’s no danger of the deal monopolizing that space.

The only question left now is will WWE Daniel Cormier be a good guy or a heel?