What a difference a week makes.
WWE shares have rallied nearly 25% the past five trading days as investors warm to the idea of a sports-focused entertainment giant created by the proposed combination of WWE and UFC. Closing at $102.81 a share Monday, WWE shares are just shy of the $105.98 per share value UFC parent Endeavor Group Holdings asserts WWE equity holders are getting in the merger.
After WWE controlling shareholder Vince McMahon pushed for the company to maximize shareholder value several months ago, “The combination is probably the most natural and synergistic of the permutations you could have come up with around potential outcomes early on,” Northcoast Research managing director and stock analyst John Healy said in a phone call. “There’s probably going to be a new excitement with these two entities together. And, internally, competition creates strength across an enterprise, and I’m sure these businesses, while friends, will be competing to be the strongest part of the operation.”
The rally represents a big swing in both price and sentiment from Wall Street’s initial reaction. The deal appeared to taste sour to investors right after it was announced at the start of last week. Within three hours of the news, WWE shares were hammered as low as $82.81 on the biggest trading volume in three years. While Endeavor is acquiring WWE, it is combining the business through a cash-free stock deal into a standalone publicly traded entity with UFC that will be 51% owned by Endeavor and 49% owned by current WWE shareholders.
“Generally, sellers prefer cash deals, which just have more certainty,” said Thomas Smale, CEO of boutique mergers and acquisitions advisor FE International, in a video call. “Whereas with creation of a public company involved, there is less certainty over the long term as to what that deal is going to be worth.”
In other words, just because Endeavor says WWE shareholders are receiving $105.98 a share in value doesn’t mean the business will be traded at that price once the merger closes, probably late this year.
“I chalk it up to stock dynamics as opposed to operational dynamics,” says Healy, of the first day reaction. “Sometimes folks are playing for certain outcomes, and if investors don’t see a set, perceived outcome that they were expecting, they move on and make their bets elsewhere. To some degree, that’s what happened here.”
No one benefits more from the shift in perceived outcomes the past week than McMahon. McMahon’s 28.75 million WWE shares were worth $2.38 billion at the post-announcement low. He is almost $600 million richer since—his stake is now worth $2.96 billion based on Monday’s closing price.
For the wrestling billionaire, he likely ends up with the best of both worlds: a sizeable valuation on the company he has spent his life building with a major say in the future of the to-be-named UFC-WWE business. McMahon will be executive chairman of the new business and its largest shareholder, with just about 19% of its equity—even though he did surrender complete control of the business, something pundits thought he may not do.
“I thought the biggest question would be not who Vince would sell it to, but would he actually pull the trigger on a transaction and on changing control of the business he and his family have cultivated over the past few decades,” said Healy. The deal “is structured in such a way that McMahon has a seat at the table and a voice of leadership and … I think he’s excited. An excited entrepreneur and innovator like him is always a good thing to have on board.”