Grey Owl Capital: Hidden Value In WWE

Grey Owl Capital: Hidden Value In WWE

Grey Owl Capital recent post on WWE

At this week’s Consumer Electronics Show, World Wrestling Entertainment (WWE) announced the launch of WWE Network. Covering the event, The Wall Street Journal wrote, “World Wrestling Entertainment Inc. is sidestepping the cable world that long has been its bread and butter to launch the WWE Network, a subscription-only, online video channel that will air round-the-clock programming.”

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While a terrific opportunity for significant value creation, it is unlikely this is a complete “sidestep” of cable. Rather, WWE is flexing its collective muscle as it continues to renegotiate its two largest broadcast rights agreements with NBC Universal. The contracts for “Raw” and “Smackdown” expire this year and NBC Universal’s exclusive negotiation period concludes at the end of this month. The timing of the network announcement seems aimed at pushing NBC Universal toward action. It was as if they said, in the words of the late Randy “Macho Man” Savage, “Hey NBC, snap into a Slim Jim!

We typically invest in high-return businesses, with strong competitive advantages, and executives with a record of excellent capital allocation and balance sheet management. We aim to hold these types of investments for at least 3-5 years and in the best case, forever. We discussed our five largest positions, all of which meet these criteria, in our third quarter 2013 letter.

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WWE does not exactly fit these parameters. Yet, we are owners of WWE equity. It is our belief that the current “Raw” and “Smackdown” distribution agreements are so far below market that there is a high probability they will renew at 2, 3, or even 4x the current rate. The majority of this new revenue should flow to the bottom line. Thus, we were willing to overlook their shareholder-unfriendly dual share class structure, an operating history that includes questionable capital allocation decisions, and a dividend that is not covered by current cash flow. The immediacy and magnitude of the event present an incredible risk reward dynamic.

We have followed the evolution of the media business for some time, compelled by the increasing value of content in general and “DVR-proof” content (typically live sports) specifically. Additionally, we find the ongoing shift in media consumption patterns brought on by the proliferation of broadband Internet access intriguing. We watched from the sidelines for several years. Then, we came across a Forbes video and story highlighting the pending WWE broadcasting deal negotiations. We immediately recognized the investment opportunity.

The analysis is relatively straightforward:

  1. WWE content is approximately as valuable as “live sports” content. While WWE events are not “live sports” they have attributes that make them equally “DVR-proof.” Nielson estimates that 95% of the TV audience for sports watches live. Live viewership for WWE events is in the low 90%s.
  2. Given current market rates, WWE should be able to increase their rights fees by 2-4x. WWE’s current deals are both several years old and were below market from the beginning. If WWE is able to renegotiate their cost per viewer hour to match the low-end of current sports rights deals (Fox’s NASCAR deal) their rights fees would more than double. At the high-end (NBC’s NHL deal), their rights fees would increase more than 13x. 2-4x is a conservative estimate.
  3. A market-rate rights deal for “RAW” and “Smackdown” would translate to significantly higher EBITDA and a much more valuable business franchise. A doubling of the rights fees would add close to $85mm to EBITDA. A quadrupling would add close to $255mm. At three times the current contract, we get a back-of-the-envelope fair value around $25 / share. This is almost 50% upside from today’s price of $17.
  4. The catalyst is imminent. With NBC Universal’s exclusive period about to expire, we believe a new deal could be announced in the next few months.

Oh, by the way, the WWE Network could have some value too.

Long WWE.

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